A week ago, the 50-basis-point move was seen as a sure thing. But the failure of California-based Silicon Valley Bank and turmoil at Swiss lender Credit Suisse called into question how much the ECB would continue tightening monetary policy
On Wednesday, Credit Suisse, Switzerland’s second largest bank, said it would borrow up to 50-billion Swiss francs from the Swiss central bank to shore up its liquidity position and allay fears of a bank run.
Central banks are facing a dilemma that has crystallized over the past week. After raising interest rates at the fastest pace in a generation to combat high inflation, cracks are emerging in corners of the financial system on both sides of the Atlantic. That heightens the tension between restoring price stability, by continuing to raise interest rates, and adding to financial system woes.
Central banks are having to step back into their role as lenders-of-last-resort. The Swiss central bank’s decision to offer a liquidity lifeline to Credit Suisse is reminiscent of moves by central banks during the 2008 Financial Crisis. Similarly, the U.S. Federal Reserve announced a $25-billion lending facility on Sunday, giving smaller regional banks the ability to swap their illiquid assets for cash in the event of bank runs.
Over the past week, investors have slashed their bets on how much further central banks will lift interest rates. That led to huge moves in the bond market. The yield on two-year U.S. Treasuries is a percentage point lower than a week ago – the sharpest repricing since the 1980s. Benjamin Reitzes, Bank of Montreal’s director of Canadian rates and macro strategy, said that bond investors have become increasingly pessimistic over the past week.
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