Can central banks maintain financial stability and continue their battle against inflation? Over the next few months, we are going to find out.
In theory, central banks have separate tools for monetary policy (interest rates and quantitative easing/tightening) and financial stability (liquidity interventions and countercyclical capital buffers), meaning they don’t face a trade-off between monetary and financial stability targets.
But the turmoil triggered by the collapse of Silicon Valley Bank (SVB) and the sale of Credit Suisse (US:CS) to fellow Swiss giant UBS (US:UBS) has seen market expectations for interest rates plummet as traders question how much further central banks will increase rates in the face of growing financial stability concerns. Since 10 March, expectations for the year-end Fed Funds rate have fallen by 150 bps and almost 65 bps have been knocked off expectations for the year-end bank rate in the UK. Investors in bank stocks did at least see a rebound on Monday after the Credit Suisse deal had initially knocked UK banks by 3-5 per cent.