Tighter financing conditions in markets sparked by banking sector turmoil may have done much of central banks’ jobs for them, boosting the case for an end to interest rate hikes soon.
The Fed is tipped to raise rates by 25 basis points on Wednesday, compared with expectations of a 50 bps move earlier this month. Since the collapse of Silicon Valley Bank and a rout in Credit Suisse shares that led to its takeover on Sunday by Swiss rival UBS, market funding conditions have tightened sharply.
U.S. bank stocks have fallen some 16%. European banks are down 11% even after a post Credit Suisse-rescue bounce. “Even assuming that market volatility does subside over the coming days and weeks, we think some residual tightness in financial conditions is likely to remain,” said ABN AMRO senior economist Bill Diviney.
“The rates volatility has been driven by inflation and growth fears and positioning washouts so these moves should be taken with a grain of salt,” said Patrick Saner, head of macro strategy at Swiss Re, referring to wild swings in government bonds.