ALEX BRUMMER: Central banks are losing the plot in the battle against inflation with more reckless rate hikes
Two down and one more to go. Christine Lagarde and the European Central Bank (ECB) continue with the big tightening – rate hikes by another quarter of a percentage point to 3.25 percent.
It followed the US Federal Reserve, which raised interest rates by the same amount a day earlier to a 16-year high of 5 percent to 5.25 percent.
Now we await Governor Andrew Bailey’s words and the Bank of England’s decision next week. If the form is followed, the Bank opts for a new increase.
Britain’s headline inflation of 10.1 percent in March is one of the highest in the Western world, labor disputes rage on and despite efforts to curb demand, the latest purchasing managers’ index shows that the services sector is thriving.
Gamble: Christine Lagarde and the European Central Bank continue the big tightening – rate hikes another quarter of a percentage point to 3.25%
Over the past quarter century, the Bank of England and other central banks have become the most trusted institutions in major democracies.
Star former ECB chief Mario Draghi was called up to become Italy’s prime minister. In the US, ex-Fed chair Janet Yellen was thrown out by Donald Trump and then appointed as Treasury Secretary by Joe Biden.
In Britain, former Governor Mark Carney was seen as a shoo-in for the Canadian Prime Minister were it not for the dynastic rise of Justin Trudeau.
The shine is off the ball.
In the US and UK, the temporary cost of living 2021 narrative turned out to be a colossal mistake. The Bank and the Fed moved too slowly to raise rates from emergency levels as prices rose.
Supporters of Andrew Bailey may remember flirting with negative rates and writing to the big banks to test the waters.
Europe has been so slow to start tackling inflation that ECB President Christine Lagarde is threatening more as the Fed now falters amid a full-blown banking crisis.
When one of her delegates was asked if Europe could also be threatened by the sharp reversal in interest rates, he dismissed Credit Suisse’s failure as long-overdue and the US banking crisis as ‘idiosyncratic’.
The ECB did not acknowledge that Credit Suisse’s flight accelerated as Silicon Valley Bank and Signature were scrapped.
Deutsche Bank, one of Europe’s largest lenders, faltered as quakes from across the Atlantic spread.
The shattered confidence has now killed a proposed £10bn deal between First Horizon and TD Bank, which would have formed America’s sixth largest lender.
In March alone, cautious UK households raised £4.8bn from banks and building societies and put £3.5bn into National Savings & Investments.
If the cause of the withdrawals were simply low yields, the bird would have flown long ago.
As much as one can admire the cool head of JP Morgan Chase Chairman Jamie Dimon in a crisis, who suggested that the rescue of First Republic of San Francisco would end the tumult, he was wrong.
Shares in Los Angeles-based Pacwest have imploded as it claimed to be exploring strategic options — code for “someone, please come save us.”
Once Pacwest is resolved, attention will likely shift to the fall in shares of Arizona’s Western Alliance Bancorp.
The idea that banking in Europe is somehow rock solid needs to be corrected.
Refinitiv Lipper data shows £30 billion in net flows from banks to European money market funds in March. In today’s turbulent markets, the US has shown how quickly a stream can turn into a raging deluge.
Central bankers are so concerned about salvaging reputations as trusted warriors fighting inflation that they risk undermining the stability they sought to maintain after the three shocks of Russia’s great financial crisis, pandemic and war in Ukraine.
It was crucial that the battle against higher prices was fought.
What was missing from many of the measures taken is an analysis of the distortions caused by aggressive rate hikes.
The Liz Truss interlude in the UK and the dismal impact it had on government bonds, pensions and fixed rate mortgages provided a window into how sensitive the entire financial system is to interest rate changes.
The US banking system is under acute pressure and it is clear that the latest rate hike was a mistake.
In the rush to repair their reputation as inflation hawks, central banks have acted rashly.