The banking sector was plunged into crisis during March as the collapse of two US banks and Credit Suisse in Europe raised questions about the strength of the financial system.
- Six central banks took coordinated action to ensure US dollar liquidity
- The US federal funds rate was raised by 25 basis points
- The ECB raised rates by 50 basis points
Banking turmoil: the banking sector was plunged into crisis during March as the collapse of two US banks and Credit Suisse in Europe raised questions about the strength of the financial system. Six central banks – including the US Federal Reserve (Fed), the Bank of England, the European Central Bank (ECB) and the Bank of Japan (BoJ) – took coordinated action to enhance the provision of US dollar liquidity through the global financial system. Demand for government bonds surged and the yield on the ten-year US Treasury bond fell from 3.93% to 3.48% over the month.
“We have to bring down inflation to 2%” (Fed Chair Jerome Powell)
Tighter credit conditions? As interest rates have risen, some banks have struggled to cope. In the US, Silicon Valley Bank (SVB) and Signature Bank collapsed, and First Republic Bank was propped up by a consortium of banks, although shares in First Republic had lost 89% of their value by the end of March. The S&P financials sector fell by 9.74% over the month. In Europe, Swiss bank Credit Suisse was bought by UBS. The Dow Jones Industrial Average Index rose by 1.9% over March.
Fed hikes again: having raised rates by 25 basis points in March, the Fed is expected to implement one more 25bp increase. Looking further ahead, although the Fed does not appear to be considering a rate cut before 2024, investors have nonetheless begun to speculate on the possibility of a cut this year. US inflation fell from 6.4% to 6% year on year in February, and the Fed raised its forecast for inflation at the end of 2023 from 3.1% to 3.3%. Fed Chair Jerome Powell said: “We have to bring down inflation to 2% … There are real costs to bringing it down to 2% but the cost of failing is much higher”.
ECB remains focused: despite the turmoil in the financial sector, the ECB raised its key interest rate by another 50 basis points during March. The ECB maintained that the eurozone’s banking sector was “resilient, with strong capital and liquidity positions” and ECB President Christine Lagarde insisted that the situation was different to that of 2008, saying: “The banking sector is currently in a much, much stronger position”. The ECB downgraded its inflation forecast for 2023 from 6.3% to 5.3%. The Dax Index rose by 1.7% during March.
To view the series of market updates through March, click here
