Global markets were last week hit by the collapse of several regional banks in the US and uncertainty over the future of Credit Suisse Group AG in Switzerland. While the problem of each bank has its own cause and should be viewed individually rather than systemically, it is clear that the aggressive interest rate hikes by the US Federal Reserve and other major central banks over the past year have played a key role in triggering the crisis, as their monetary tightening aimed at taming inflation is having hazardous effects on financial stability.
Within one week, three US banks — Silicon Valley Bank, Silvergate Bank and Signature Bank — collapsed, after their poor balance sheet management made them vulnerable to the rate hikes. Meanwhile, 11 major US banks provided a US$30 billion lifeline to First Republic Bank to tide it over the liquidity crisis, and Credit Suisse, Switzerland’s second-largest bank, on Thursday obtained a lifesaving US$54 billion credit line from the Swiss National Bank.
The developments put authorities around the world on alert for signs of contagion, as fears of more bank collapses surfaced last week. Financial stocks lost billions of dollars in value, and speculation swirled that the Fed’s Federal Open Market Committee might after a meeting this week announce a smaller-than-expected rate hike, or even keep its rate unchanged, to stabilize financial markets.
The Fed initially misjudged the spike in inflation as transitory, but reversed course in March last year and has since raised its rates by 450 basis points. Now it faces a dilemma: Inflation outlook remains uncertain, but raising the rates to rein it in might cause more financial instability.
Unfazed by the turmoil, the European Central Bank (ECB) on Thursday stuck to its plan to lift rates by 50 basis points. The bank’s accompanying statement showed its determination to ensure that inflation falls to its 2 percent medium-term target. Yet, the ECB only provided limited guidance regarding future policy decisions, taking into account financial stability concerns.
In Taiwan, the Financial Supervisory Commission last week said that the domestic banking sector remains resilient, with strong capital and liquidity positions, as local lenders’ exposure to troubled US regional banks and Credit Suisse is limited.
However, as the risks in the global financial sector are increasing and the external environment is becoming more complicated, Taiwanese market participants have started to speculate about future rate hikes, especially at a meeting of central bank policymakers this week.
Since March last year, the central bank has raised its rates by 62.5 basis points, a much milder pace than its US and European peers.
However, the risk of higher inflation is likely to linger, after the government announced that it would raise electricity rates from next month, and as it is considering a pay raise for public-sector workers. In the first two months of this year, the consumer price index rose 2.74 percent from a year earlier, and the gauge is unlikely to retreat below 2 percent this year, the National Development Council said. Therefore, the central bank’s monetary policy should still prioritize curbing inflation and keeping inflation expectations stable. It is not yet time to stop raising interest rates.
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