The Bank of England’s decision to raise interest rates from 4% to 4.25% on Thursday is uncertain, with the market currently giving it a 50% chance. While previous estimates had fully priced in the rate hike, the global banking sector’s fragile fundamental situation has caused the odds to diminish. Chancellor Hunt hopes the UK economy can avoid a recession in 2023, but with UK CPI expected to fall to 9.8% annually in data released on Wednesday, the BoE might take a less hawkish stance.
The ECB’s ‘dovish’ 0.5% rate hike last week was a surprise, as it did not mention its previous commitment to keep ‘raising interest rates significantly at a steady pace’. This move was attributed to the sudden collapse of Credit Suisse’s share price, and the bank was ultimately given a CHF 50 billion emergency liquidity facility. Although the ECB stressed that Eurozone banks are in good health, the market will watch for signs of stress.
The US banking system is under pressure after the collapses of SVB and Signature Bank, caused by substantial bond losses at SVB and depositors’ rapid withdrawals from both institutions. The Fed has stepped in, giving assistance to the tune of US$155 billion on Friday. Although JP Morgan, Bank of America, and Citigroup have put US$30 billion into the First Republic’s coffers, it remains to be seen whether this is enough to stop the current turmoil. With the banking crisis ongoing, the Fed may avoid hiking rates on Wednesday. Fed Chair Powell faces the challenge of swiftly ending the banking crisis while continuing to bring inflation down to his 2% target.