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In our Market Monday insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
Bank of England hikes interest rates again following inflation shock
The Bank of England has once again hiked interest rates by a quarter of a percentage point Thursday, extending its long-running fight to rein in prices after a surprise increase in inflation observed in February.
The central bank’s 11th consecutive rate hike takes benchmark borrowing costs to 4.25%, the highest since October 2008. Like other major central banks, it has pushed ahead with raising rates despite recent turmoil in the banking sector in the race to deal with the fallout of banking collapses in both the US and EU.
The Bank of England said in a statement that since its last meeting in February, inflation had surprised significantly on the upside and the near-term path of GDP was likely to be somewhat stronger than previously expected.
Employment growth had also been more robust than anticipated and household disposable income was now expected to remain flat in the near term, rather than falling significantly after the government extended its support for energy bills.
It said that it would raise rates further if there were to be evidence of more persistent price pressures.
UK consumer prices surged by 10.4% in February compared with a year ago, the first observed rise in inflation in over four months, as food prices soared and the cost of visiting restaurants and hotels increased.
The turmoil in the banking sector has increased uncertainty over the inflation outlook, because banks are now widely expected to quickly tighten their lending criteria, which would weigh on consumer demand and business investment, and therefore alleviate any further price pressures as a result.
The Bank of England said it would continue to closely monitor any effects from the banking crisis on credit conditions faced by households and firms, with it adding that the UK banking system remains resilient in spite of the recent global financial worry.
IMF chief warns global financial stability at risk from recent banking turmoil
The head of the International Monetary Fund has warned that the global economy faces risks to its financial stability because of the recent developments in the disrupted banking sector.
Kristalina Georgieva, the managing director of the Washington-based IMF, gave a stark warning that the rising interest rates had drastically increased pressure on debts, leading to stresses in leading economies, including among the key lenders of the global financial markets.
Georgieva said the world economy would expand by just 3% in this year as rising borrowing costs, combined with the war in Ukraine and scarring from the Covid-19 pandemic, would continue to suffocate economic growth.
Adding to a growing list of concerns from economic leaders, the IMF chief said it was clear that risks to financial stability had taken a dramatic turn after the recent collapse of Silicon Valley Bank and the Swiss-government brokered emergency rescue of Credit Suisse by UBS.
Investors will be keenly watching shares in Deutsche Bank when European markets reopen on Monday after they led the sell-off in banking stocks on Friday of last week as the fallout from financial struggles continues.
Her stark comments came as the European Central Bank (ECB) said the recent turmoil in banking would have a real-world impact on business and growth not only in Europe but globally as well.
The EU central bank fears problems in the banking sector will result in lower growth and dampen inflation, which was echoed by ECB vice-president Luis de Guindos.
As economic stress increases in the UK, EU and the US, so-called shadow banks, a term for non-bank financial institutions, could further expose cracks in the financial system, thus leading to even further financial disruption as a result.
This statement came as regulators in Switzerland continued to grapple with the fallout from the collapse of Credit Suisse. Public pressure has mounted on regulators after a vast package of support for the bank in the wake of its emergency merger with fellow Swiss bank UBS.
The controversies over the recent bailout have added to concerns over the global financial crisis caused by the recent toppling of major financial institutions in the US and Switzerland as the shaky period for the world economy continues.
US government raises interest rates despite recent banking turmoil
The US central bank has raised interest rates again, despite fears that the decision could add to financial turmoil after a string of bank failures.
The Federal Reserve increased its key rate by 0.25 percentage points, calling the banking system "sound and resilient" after the recent key events in the US banking crisis.
But it also warned that fallout from the bank failures may hurt economic growth in the months ahead, with the Federal Reserve raising borrowing costs in a bid to stabilise prices as economic woes continue.
But the sharp increase in interest rates since last year has led to further strains appearing in the banking system.
Two US banks - Silicon Valley Bank and Signature Bank - collapsed in March, buckling in part due to problems caused by higher interest rates introduced in recent months.
There are now concerns about the value of bonds held by banks as rising interest rates may make those bonds less valuable with each passing rate hike.
Banks tend to hold large portfolios of bonds and as a result are sitting on significant potential losses, which is further adding to the visible concerns seen in banks across the US.
Falls in the value of bonds held by banks are not necessarily a problem unless they are forced to sell them, which could become a reality if the struggles continue.
Authorities around the world have said they do not think the failures threaten widespread financial stability and need to distract from efforts to bring inflation under control.
Last week, the European Central Bank raised its key interest rate by 0.5 percentage points in a further response to the banking crisis which has seen various global impacts.
