The US Federal Reserve will raise the key rate at the upcoming meeting on March 21-22 by 0.25 percentage points to a range of 4.75-5% per annum. This is the consensus forecast of Izvestia. Back in early March, analysts expected a more aggressive increase, but now the US regulator will take into account the risks of problems with banks. In March, several financial institutions in the country collapsed due to the rise in the value of money. However, the Fed prefers to support savers, but continue to fight rising prices, experts explained.
Raise to be
Increase in the base rate of the US Federal Reserve by 0.25 p.p. expect nine out of 11 experts from banks, financial institutions and rating agencies interviewed by Izvestia. Associate Professor of the Department of World Financial Markets and Fintech of the Russian University of Economics G.V. Plekhanova Tatiana Belyanchikova presented two options: either the regulator will leave the rate at the same level or raise it by 0.25 p.p. Financial analyst of the Finmir marketplace Sergey Chevrychkin believes that the rate will be kept at the current level due to a decrease in inflation in the United States to 6% and the turbulence that has formed in the banking system after the bankruptcy of Silicon Valley Bank (SVB) and Signature Bank.
Two weeks ago, after the statements of the head of the Fed Jerome Powell, most market participants were confident in raising the rate by 0.5 percentage points.
At the same time, the European Central Bank (ECB) at a meeting on March 16 raised the key by 0.5 percentage points. Now the base interest rate on loans is 3.5%, on deposits – 3%, on margin loans – 3.75%. The regulator stressed that inflation in the eurozone remains “too high” for a long time.
Central banks have faced a serious challenge: since March 2022, and the ECB has been aggressively raising interest rates since the summer of the same year to cope with inflation that has been record for decades and proclaimed their intention to achieve a steady reduction in it to the target 2%, the head of the department reminded Izvestia macroeconomic analysis FG “Finam” Olga Belenkaya. As a result, price growth began to slow down, but remains several times higher than the target levels, the expert noted.
Then, problems with liquidity in the banking sector began to appear in the economy, customers and the market began to lose confidence in the system, which also creates financial stability risks, the economist stressed. The general problem for the sector is related to the increase in rates in the economy. For example, the American Silicon Valley Bank, because of this, depreciated bonds, the yield of which was fixed at low rates.
The Federal Reserve has already softened the first reaction of clients, promising to pay them deposits for amounts not insured with SVB, Georgy Ostapkovich, director of the Center for Business Research at the HSE Institute for Statistical Studies and Economics of Knowledge, recalled. So they try to convince customers that this is not a complex financial crisis, as in 2008-2009, but a problem of the management of a particular bank, he said.
Aggressive growth
During the year, the FRS rate was increased by 4.5 percentage points, which is beginning to affect the stability of the financial sector, said Viktor Grigoriev, an analyst at the Directorate for Operations in Financial Markets at Bank Saint Petersburg.
– The current problems are dangerous because the reason for their formation lies not in the use of any risky practices by the bankrupt banks, as was the case in 2008-2009, but in a sharp drop in the value of “reliable” US government bonds, which began to lose their value as a result of aggressive increase in the FRS rate, – believes Andrey Vanin, head of financial market analytics and premium services for the Gazprombank Investments service.
Since the asset portfolio of most US banks is dominated by government bonds, raising the rate will increase the risks of the stability of the entire system, the analyst said. Guided by data including the growth of core consumer prices in the US by 0.4% m/m in February and by 0.5% in January, Gazprombank Investments expects the Fed to raise the Fed rate by 0.25 percentage points. It is also likely that the regulator will announce a further pause, Andrey Vanin suggested.
SberCIB Investment Research currency and interest rate strategist Yuri Popov, in an interview with Izvestia, admitted that the situation in the US banking sector would stabilize after the intervention of regulators. At the same time, according to him, the bankruptcy of American financial institutions in the current situation may be a harbinger of a debt crisis.
However, the ECB has not changed its tough rhetoric regarding monetary policy. The regulator raised the rate, thereby increasing the profitability of deposits in order to reassure customers and motivate them not to take money from banks, Aghvan Mikaelyan, a member of the board of directors of the audit and consulting network FinExpertiza, believes. In the short term, the decision will support the stability of the banking system. But in the long term, it will not work to keep the course towards tightening monetary policy, and the ECB will have to adjust its approaches, he added.
An increase in the rate by the European regulator may become a trigger and provoke new large-scale problems in the banking sector of the European Union, Evgeny Shatov, partner at Capital Lab investment company, believes. Most likely, they will appear in the coming weeks, he concluded. The second-largest Swiss bank Credit Suisse has already become the first sign – it asked the national regulator for $54 billion in assistance.
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