When I was in university, the financial crisis was something discussed regularly, an event that caught many people given how successful the period leading up to the great crash appeared. This time, the crisis is different and the immediate period before was less than enjoyable for most, with the effects of the pandemic and growth booms following, quickly collapsing considering the conflict in Ukraine causing really high levels of inflation for many countries around the world.
Understanding the Impact of Increasing Interest Rates
In today’s note, we will discuss what’s happening now, in particular, how increasing interests rate can have positive and detrimental effects. While the main goal of raising interest rates is to cool down a booming economy or combat inflation, it can sometimes have unintended consequences, as we saw in 2006 when a series of interest rate hikes contributed to the great financial crash.
The Recent Events and Concerns About the Global Banking System
This year, the Federal Reserve and the Bank of England were expected to increase interest rates again, something that we have seen for a while now. However, the recent collapse of Silicon Valley Bank or SVB for short, in the US, along with the sale of its London subsidiary to HSBC, and the rescue of Credit Suisse has prompted analysts to reconsider their predictions, it might be looking worse than we first thought. These events have raised concerns about the health of the global banking system, which can have major effects on every one of us. It brings a valid question of whether more banks and financial firms have made similar risky bets that could lead to further problems.
All will be looking at the next Bank of England’s Monetary Policy Committee (MPC) meeting and whether they decide to continue to increase rates. If the situation doesn’t worsen, we might still see a 0.25 percentage point hike.
However, even before these recent bank rescues, there was a growing case for easing back on interest rate rises. Some economists are starting to think that rates have risen too much, the situation with SVB and other banks may provide a rationale that this is the case.
It’s worth noting that some MPC members believe the UK economy is showing renewed momentum and is more robust than expected. In fact, most forecasters have upgraded the UK’s economic progress, with the Treasury’s independent forecaster, the Office for Budget Responsibility, stating that a previously predicted recession will no longer happen this year. However, other MPC members argue that the 10 consecutive rate rises since December 2021 should be allowed to feed through into higher mortgage and business borrowing rates before more are considered.
What Does This Mean for Investors?
So, what does all this mean for you, the investor? It’s crucial to keep a close eye on interest rate decisions and their potential impact on the global banking system. While raising interest rates can sometimes be necessary to combat inflation or cool down a booming economy, it can also put banks in trouble if they’ve made risky bets that depend on cheap financing. The crisis of 2008 reminds us that inaction could be a positive move, and sometimes it’s better to let things settle before pushing borrowing costs higher.
Overall it’s essential to stay informed and consider the possible consequences of interest rate hikes on both the economy and the banking system. As investors, we must be prepared for various scenarios and understand that sometimes, less is more. Stay tuned for more updates on this important topic and, as always, happy investing!
Stay ahead of the curve and become a savvy investor by reading our previous post about the domino effect of bank collapses. It provides valuable advice on successful investing, whether you’re a beginner or a seasoned pro. Click here to read it and start maximizing your returns.
