Global | Turbulence in the banking sector and inflation

The recent financial turmoil in the US and Swiss banking system has exacerbated the already complex monetary policy and inflation outlook, following several years of economic shocks. The central banks have reacted well by separating anti-inflation instruments from financial risk prevention.

Key points

• Key points:
• The COVID lockdowns and ensuring shutdowns in many sectors of the economy led to dire supply disruptions and bottlenecks along global production chains. The ship jammed in the middle of the Suez Canal was a perfect metaphor for the wider problems.
• On top of this, we witnessed —almost simultaneously— the recovery in demand, and in early 2022, the war in Ukraine sparked yet another strong supply shock, especially in Europe. This time around, the situation was quite different as it affected a raw material (Russian gas) with fewer available alternatives than would have been the case for oil.
• Headline inflation has been falling for eight straight months in the US (from a high of 8.9% in June to 6% in February), and for five months in the eurozone (from 10.5% in October to 8.5%), yet core inflation remains high and has been falling at a slower pace (currently at around 5.5% in both economies).
• The fresh turmoil in the banking sector due to the crisis at Silicon Valley Bank in the US and then Credit Suisse in Switzerland has thrown up a new challenge for central banks, which had only just managed to convince the markets that they were serious about tackling inflation, and that they were not going to lower interest rates this year once they peaked.
• However, they have done well in reacting to the latest financial stress by separating inflation-fighting instruments (interest rates) from those used to stop banking crises from spreading (injecting liquidity and arranging workable solutions for the affected banks).

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