Interest rates rose. For years banks booked low fixed-rate loans. They comprise 80% in France, 85% in UK and 90% in US. Banks now face losses on them. Loans at variable rates can charge more but risk a wave of defaults from borrowers.
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Silicon Valley Bank (SVB), which served tech start-ups, shut down after a rapid slide in deposits. Its clients were struggling to raise cash, thanks to a tech downturn, and had to withdraw deposits.
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A year ago the Federal Reserve launched its first attack against inflation. Subsequent months saw much larger hikes, reaching 4.5%, with inflation falling to 6.4%, down from 11% last summer.
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The Federal Reserve won’t be able to get US inflation down to its 2% target without “crushing the economy,” economist Mohamed El-Erian warned, “You need a higher stable inflation rate of 3% to 4%, not 2%”.
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The US Fed increased interest rate by 0.25%, bringing the fed rate to between 4.5%. The Fed added that while inflation had eased somewhat, it remained elevated.
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The US was the first major economy where inflation took root, as a wave of pandemic relief money from the government set off a boom in activity and spending.
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