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By Wesleyan

Interest rates rise despite banking turmoil

financial planning
3 min
Woman solemnly looking out of window, holding letting in hands

The failure of Silicon Valley Bank in the US sent shockwaves around the global financial markets in March, while central banks increased interest rates again as they continue to fight inflation.

There was more pain for mortgage borrowers in March when the Bank of England hiked interest rates once again after an unexpected rise in inflation. The bank raised borrowing costs for the eleventh successive time by a quarter percentage point, taking them up to 4.25%. UK inflation jumped to 10.4% in February, up from 10.1% the previous month, driven by surging food prices. Food prices are now at their highest in 45 years, putting added pressure on families dealing with the cost of living crisis.

In the Spring Budget, Chancellor Jeremy Hunt announced plans to help with energy costs as well as improvements to childcare access and changes to the pensions lifetime allowance. He said that forecasts from the Office for Budget Responsibility (OBR) showed the UK should avoid a recession, although the economy is forecast to contract overall this year by 0.2%. The OBR also expects inflation to more than halve and fall to 2.9% by the end of the year.

US federal reserve hikes rates

The US Federal Reserve (Fed) raised interest rates again despite fears that it could add to turmoil after a string of bank failures. The central bank hiked interest rates by a quarter percentage point in a bid to help bring down stubbornly high inflation. The decision takes the upper limit of interest rates to 5% – the highest level since 2007.

Global markets tumbled when Silicon Valley Bank (SVB) collapsed, causing shares in US and European banks to fall. In contrast, government bond prices rose as investors rushed for safe-haven assets. However, the US government intervened and provided support to SVB, guaranteeing all depositors access to their funds.

The turmoil has been blamed on the fall in value of SVB’s US government bond holdings, caused by the rapid rise in interest rates over the past year. Bond prices fall when interest rates rise, so the rise in rates eroded the value of SVB’s bond portfolio. The collapse of SVB was the largest bank failure since the 2008 financial crisis. US regional bank Signature Bank also collapsed, while Swiss bank Credit Suisse ran into trouble and was taken over by UBS.

US inflation slowed to 6% in February, down from 6.4% the previous month and significantly lower than the 9.1% peak of inflation seen in June. Despite high interest rates, the world’s largest economy continues to defy expectations of a slowdown. Employers added 311,000 jobs in February, a stronger than expected showing, while unemployment also remains close to a 50-year low at 3.6%.

China sets new growth target

China’s political leaders have announced a plan to expand the country’s economy by 5% this year, marking the lowest target set in over three decades. This modest goal highlights the significant challenges the nation faces as it tries to recover from the impact of its zero-Covid approach.

Despite the obstacles, China’s economy has shown promising signs of recovery, with the country experiencing an upswing in January and February after three years of Covid controls. The period saw industrial output increase, while retail sales also climbed. These improvements suggest China’s anticipated recovery is progressing steadily, following one of its weakest years for growth in 2022. However, property investment remains a concern, as it has declined. This reflects the cautious approach of both home buyers and developers.

The European Central Bank (ECB) raised interest rates for the sixth successive time, taking them up by half a percentage point to 3.5%. Inflation in the euro area continues to fall, dropping in February to 8.5%, down from 8.6% the previous month. But while it now appears to be past its peak, it is still well above the central bank’s target of keeping inflation below 2%.

The price of European natural gas has fallen to its lowest level as the energy crisis continues to fade, which is helping to boost euro area economies*. However, Germany’s central bank said that while the country’s economy is starting to recover, it could shrink in the first quarter.


*  Eurostat

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