Rate hikes back on agenda as banking turmoil eases

As recently as last weekend, the ECB was widely expected to follow through with a further hefty rate increase of 50 basis points, or half a percentage point, when it meets next. Picture: Michael Probst

The yields or interest rates for Irish and other eurozone government bonds headed higher again, a sign that investors are betting the European Central Bank (ECB) may be forced to continue to hike rates despite the turmoil that has enveloped global banks.

As recently as last weekend, the ECB was widely expected to follow through with a further hefty rate increase of 50 basis points, or half a percentage point, when it meets next.

SVB collapse 

The turmoil sparked by the collapse of Silicon Valley Bank (SVB) at first bolstered the view among traders that the ECB and the US Fed, which meets next week, would be spooked, and tamp down on future rate rises.

However a rally in global bank shares and, significantly, for eurozone government bond yields, may signal that hefty official hikes in interest rates are back on the cards.

The yield on the Irish 10-year bond rose to over 2.9% and the equivalent German bond also rose to trade at a yield of 2.42%.

Both yields, however, are significantly lower than a week ago.

Bank shares rallied after their huge sell-off of recent days when the collapse of SVB sent shockwaves across the globe over fears for hidden exposures to technology firms that have suffered ever since the US and the eurozone started hiking official interest rates aggressively last year.

Financial traders on both sides of the Atlantic appear to be uncertain whether the ECB and the US Federal Reserve will signal some sort of slowdown in hiking the pace of rates in their battle against inflation.

Irish banks joined in the rally on Tuesday.

AIB and Bank of Ireland rose by 4% and 5% respectively but remained down since the start of the worldwide scare over Silicon Valley Bank.

US inflation

An acceleration in monthly core consumer prices in the US seems likely to reinforce the US Fed’s determination to raise interest rates to fight inflation, though the decision on next week’s move will be a tough call amid ongoing concern about financial turmoil.

February’s consumer price index, excluding food and energy, increased 0.5% last month and 5.5% from a year earlier, according to the US figures. US consumer price inflation was running at an annual rates in February.

The challenge for the US Federal Reserve now is how to prioritise inflation — which is still far too high — with growing financial stability risks in the unraveling of Silicon Valley Bank.

The US inflation figure “underscores how they don’t have the luxury to sit around and wait”, according to Derek Tang, an economist at LH Meyer-Monetary Policy Analytics.

While tentative signs of stability appeared to be returning to banking stocks that have been hammered in the aftermath of the collapse of SVB, Fed chairman Jerome Powell and his colleagues may worry that it is too soon to tighten policy again.

“February’s CPI report shows that inflation is not vanishing quickly, and there remains a compelling need for the Fed to continue raising rates,” Bloomberg Economics said.

• Irish Examiner & Bloomberg