SVB, Asia and the interest rate outlook
- 7 min
- Banks, Central banks, Interest Rates
- March 17, 2023
Regulatory responses to the failure of Silicon Valley Bank (SVB) have reassured many investors. However, some central banks such as the US Federal Reserve (Fed) may need to pause further interest rate rises to avoid aggravating fall-out from the crisis, says BNY Mellon Investment Management head of Asia macro and investment strategy, Aninda Mitra.
Major market volatility in response to SVB’s failure saw US bond yields post their biggest drop since the global financial crisis in 20081 on March 13 as investors sought shelter from swirling market volatility. While US regulators took over the bank, markets remain uncertain amid fears of wider contagion in the banking sector.
Aninda Mitra, head of Asia macro and investment strategy in BNY Mellon Investment Management’s Global Economics and Investment Analysis team, believes the crisis owes much to the end of low interest rates.
“The SVB failure was just one sign the wider macroeconomic environment is fundamentally shifting and appears symptomatic of the shifts we are seeing against a backdrop of higher inflation and higher rates as loose monetary policy draws to an close,” he adds.
Asian volatility
The crisis initially triggered a wave of volatility across key markets including Asia, with Japanese banks briefly coming under significant pressure, says Mitra. Yet despite heightened regional concern, he has been reassured by robust intervention from governments, regulators and central banks such as the US Fed.
“The rescue of depositors at SVB was both proactive and encouraging. The line of credit provided by new Bank Term Funding Program (BTFP) was another positive development which should help calm fears over regional banks more broadly,” he adds.
Despite these positive moves, Mitra anticipates continued market unease as jitters swirl across the global financial community and investors look more closely at the business models underpinning their holdings.
“Concerns are spreading beyond the US with some now beginning to question the entire wholesale funding model and the type of liquidity requirements some corporates and institutions have had in place since the end of the global financial crisis. With this in mind we believe some continued market ‘hand holding’ from the financial authorities will be required, with perhaps more coordination across policymakers on a transatlantic or even global basis to help underpin investment confidence,” he adds.
Big decisions
More broadly Mitra believes the fall-out from the SVB failure has given some central banks such as the Fed serious food for thought on whether they should continue to raise interest rates to combat inflation.
“In our view, given the sheer extent of uncertainty the correct course of action for some central banks would be to opt for a hold in policy at current interest rate levels. That said, for the first time in a very long time, for Fed in particular, all actions are on the table – they could hold interest rates at current levels, hike or even cut them!
“In our view, the next steps the Fed takes on this could prove quite critical. We believe they should probably hold interest rates where they are for now until there is more clarity on the way markets are going and it might help if the Fed remains cautious,” he concludes.
1 Reuters. Analysis: SVB collapse unleashes Treasury volatility, whiplashing investors. 14 March 2023.
GE1354406 Exp: 15 June 2023
