In 2006 the US Federal Reserve completed a series of interest rate hikes that raised its base rate from 1% to 5.25%. The plan was supposed to calm the booming economy, but ended with a major financial crash two years later.

Earlier this month, the Federal Reserve was expected to move forward with a 0.25 percentage point increase, this time from its current range of 4.5% to 4.75%, to curb inflation stemming from the COVID-19 pandemic and the Ukraine war.

That growth was thrown into doubt last week. And so was the Bank of England’s multi-flag interest rate hike, due on Thursday, which many in the City thought was a certainty.

Analysts have changed their interest rate forecasts following the collapse of Silicon Valley Bank in the US, the sale of SVB’s London offshoot to HSBC for £1, and the rescue of Credit Suisse after the Swiss threw out a $54bn (£44bn) lifeline. Central Bank.

Each bank has adopted its own risk strategy, allowing regulators to call their problems one-offs. But the worry is that too many banks and financial firms have made similar bets and their problems are still surfacing. There may be hundreds of banks that rely on cheap financing where problems begin to emerge.

Paul Dales, chief economist at consultancy Capital Economics, said concerns about the health of the global banking system had grown in recent days and could force the nine members of the Bank of England’s Monetary Policy Committee (MPC) to withdraw. .

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“It is about 50:50 between the MPC pausing or ending the series of interest rate hikes at its March 23 meeting and raising rates by 25 basis points from 4% to 4.25%,” he said.

“A lot will depend on what happens in the global banking system between now and next Thursday. If the situation does not deteriorate further, we think there will be a 0.25 percentage point increase.”

Martin Beck, chief economic adviser at EY Item Club, said there was a strong case for easing back in interest rate rises before the bank bailout.

“Even in the absence of well-publicized issues in the US banking sector, the case for raising rates again at the MPC’s March meeting was weak,” he said.

“An unexpected fall in services inflation, private sector wage growth, low energy prices and reassuring survey evidence means the risk of sustained high inflation is receding,” he added, adding that “rates in the UK have risen significantly”.

Some MPC members are likely to focus on renewed momentum in the economy that shows it is stronger than expected. While most forecasters have upgraded Britain’s economic progress, the Treasury’s independent forecaster, the Office for Budget Responsibility, said on Wednesday that the recession predicted earlier this year will no longer occur.

One of the reasons given was Jeremy Hunt’s budget, which pumped slightly more money into the economy than expected, although most of the extra funds will be spent next year and the year after.

MPC members Swati Dhingra and Silvana Tenrero took the opposite view, arguing in a series of speeches that 10 consecutive rate hikes from December 2021 should be allowed to feed into higher mortgage and business lending rates before further consideration.

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In a recent speech, Dhingra said: “This risks unnecessarily reducing output at a time when the economy is weak and deepening household pain when budgets are squeezed by energy and housing costs.”

Dales said it was significant that the MPC had changed its language in February about its outlook for rates, giving support to those who believed they had peaked in the UK.

“After raising interest rates to 4% from 3.75% in early February, the MPC changed its forward guidance to say that further increases in the Bank Rate may be necessary. [saying that] If there is further evidence of more sustained pressures, further tightening of monetary policy will be necessary,” he said.

This is a way of saying that borrowing costs can stay where they are until there is a good reason to push them up. With the ghost of 2008 lurking, inaction can be a positive move.


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