Following a tumultuous week for global banking CJ Cowan, portfolio manager at Quilter Investors, believes the Bank of England (BoE) could change its course on interest rates.
Cowan notes that while the takeover of Credit Suisse and the failure of Silicon Valley Bank are unique cases, the stress they have caused in the banking sector could lead to tightened lending standards and restricted credit growth, ultimately slowing demand and bringing inflation under control.
Cowan explained: “The abruptness of these two recent crises serves as a reminder of the historically rapid pace of policy tightening that has been delivered.”
He believes that these events put central banks in a difficult position, as financial stability concerns have resurfaced and inflation remains high.
The BoE may be looking for a reason to pause rate hikes, and Cowan suggests that the recent events could provide justification for doing so.
He adds, “Several MPC members are particularly concerned about the rate sensitivity of the British consumer given most mortgage rates are only fixed over a relatively short horizon, so it would not be a big surprise to see the BoE use recent events as justification to pause rate hikes.”
As for the Federal Reserve, Cowan anticipates a cautious approach, noting that little has changed in the real economy since Jerome Powell’s recent statement on the need for higher interest rates.
Cowan concludes that while a sustained pause at current rates could gradually rein in inflation, political pressure to control inflation quickly is high, potentially leading to further hikes unless the economy slows more rapidly or further contagion in the banking sector is prevented.
