How the US banking crisis will help in the fight against inflation

Could last month’s banking crisis be any good? The media is not as big now as it was a few weeks ago, but the boardrooms of the big banks are still very scared.

In mid-March, several US banks collapsed, starting with Silicon Valley Bank, followed by Credit Suisse in Switzerland. Banks, especially those from the US, may be more cautious in the face of a rebound: hold on to their capital. So give consumers and businesses less new credit.

This may not sound like good news, but it will help in the fight against hyperinflation in the US. America’s central bank umbrella, the Federal Reserve, has been busy fighting that battle for a year now. A key tactic of central bank policymakers is to get banks to lend less money to consumers and businesses.

As people and companies spend more money, downward pressure on prices will fall. The central bank is trying to curb spending pressure by raising its policy rates, making borrowing more expensive.

Inflation is coming down steadily

Rarely has a central bank turned its rate dial as hard as it did last year. The key interest rate rose from around 0 percent to nearly 5 percent in just 12 months, a rate not seen since the 1980s.

Meanwhile, inflation in the US has been steadily declining. In March, prices rose just 5 percent year-on-year, it appeared last Wednesday. A lot more, but well below February’s 6 percent and certainly below last summer’s peak of 9.1 percent.

Still, the central bank is far from there. Energy and petrol prices are much lower than last year and inflation is slowing. Core inflation, adjusted for factors such as volatile energy prices, has continued to rise and now stands at 5.6 percent.

Slowness is not the goal either

So, another rate hike will be on the agenda when the central bank’s policy committee meets again in May. And it’s not without risks. One rate hike is too high and the economy is unnecessarily pushed into recession.

That is why policymakers will be watching the behavior of commercial banks very closely when making this choice. Aren’t they already working on reducing their debt? Many analysts think so, or at least predict this will happen.

Because even healthy banks that were not affected last month were shocked by how quickly customers removed their money from troubled banks. Edin Mujakic, chief economist at OHV Asset Management, says: “Perhaps.”

It is very difficult for companies to get credit

In addition, economic growth expectations have been adjusted downward, he continues, and banks are already disinclined to extend credit. “In economic downturns, companies are more likely to default on loans. Banks impose strict conditions or want to see higher interest in return.

The latter aspect plays a role in the Eurozone. Every quarter, the European Central Bank calculates how easily banks are making loans. Over the past two quarters, European banks have been approving fewer loan applications. Borrowing companies often have to pay high interest rates.

As a result, central banks in both the U.S. and the euro zone may need to implement fewer rate hikes, Mujakic says. “You can hear between the lines that Fed representatives are slightly anticipating this in media appearances.”

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