How the crisis of banks near the US can help fight inflation

How the crisis of banks near the US can help fight inflation

Could the near banking crisis from last month be good for something? The media isn’t as big as it was a few weeks ago, but the boards of major banks are still very scared.

In mid-March, several US banks collapsed, starting with Silicon Valley Bank, followed by Credit Suisse Bank in Switzerland. Banks from the US, in particular, could become more cautious in the face of the recovery: hold on to their capital. Thus providing fewer new loans to consumers and businesses.

This doesn’t necessarily sound like good news, but it will help combat high inflation in the US. The U.S. central bank umbrella, the Federal Reserve, has been preoccupied with this fight for a year now. Getting banks to lend less money to consumers and businesses is very much the main tactic of federal policymakers.

The less people and businesses spend, the less pressure on prices. The central bank tries to rein in its spending drive by raising its policy rates, which makes borrowing more expensive.

Inflation is dropping steadily

The Fed has rarely shifted interest rate demand as hard as it did last year. The main interest rate has gone from about 0 percent to nearly 5 percent in just 12 months, something not seen since the 1980s.

Meanwhile, the inflation rate is steadily declining in the United States. In March, prices were “only” up 5 percent year-on-year, apparently last Wednesday. Still a lot, but well below the 6 percent in February and certainly below the peak of 9.1 percent last summer.

However, the Federal Reserve is far from achieving this. The fact that inflation is declining is mainly due to significantly lower energy and petrol prices than last year. Core inflation, corrected for factors such as volatile energy prices, continues to rise steadily, and now stands at 5.6 percent.

Stagnation is also not the intention

Thus, it is likely that a rate hike will again be on the agenda when the Federal Policy Committee meets again in May. This is not without risks. One rate hike too much and the economy unnecessarily plunges into recession.

The headquarters of the Federal Reserve, the association of American central banks, in Washington.Image Getty Images

This is why policy makers will look closely at the behavior of commercial banks when making this choice. Aren’t they already reducing their own loans? Many analysts think so, or at least expect it to happen.

Because even healthy banks that were not damaged last month were shocked at how quickly customers were withdrawing their money from troubled banks. “They’d rather keep more money in cash,” says chief economist Edin Mojacic of OHV Asset Management. “just in case.”

Companies get harder credit

In addition, economic growth forecasts have been revised downward, he continues, and banks are already less eager to extend credit. “In economic downturns, there is a higher chance that companies will not be able to pay back the credit. Then the banks will set stricter conditions or they want to see higher interest in return.”

The latter aspect also plays a role in the Eurozone. Every quarter, the European Central Bank measures how easy it is for banks to issue loans. Over the past two quarters, European banks have approved fewer and fewer credit requests. Businesses that take out credit often have to pay higher interest for it.

As a result, it is likely that central banks in both the US and the eurozone will have to implement fewer interest rate increases, says Mojacic. “You can hear between the lines that the Fed delegates are anticipating this a little bit in their media appearances.”

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