Investment Institute

Rising Interest Rates Hurt – Who Knew ?

  • 13 March 2023 (3 min read)

  • Strong US policy response to the demise of SVB – but watch the macro-financial transmission channels
  • Central banks are less united on their stance. We see the ECB to hike by 50 while the Fed should stay at 25 – while the Bank of Canada chose to pause.

The US authorities took out the “big guns” and acted decisively before the market open to contain the spillover effect from the demise of SVB (now accompanied by Signature Bank) using a two-pronged approach. First, they will “make good” on these banks’ deposits beyond the normal FDIC insurance limit. Second, the Fed has launched a new program ensuring access to 1-year liquidity at favourable terms: the par value, instead of the market value, will be used to assess collateral – providing relief against the shrinkage of the banks’ bond portfolio - and no “haircut” will be imposed. This should stem a potentially disruptive migration of deposits from small to mid-size banks to large, systemic ones. Beyond the immediate financial stability issue, the SVB episode sheds a light on the not-so-straightforward impact on higher interest rates on banks, especially when variable rate liabilities collide with fixed-rate assets accumulated at historically low yields. This is another reason to be quite attentive to macro-financial developments as a potential harbinger of difficulties in the real economy. The SVB episode is also likely to trigger more prudence at the Fed in the field of monetary policy. In any case, there was just enough softness in the payroll data last Friday to stop the Fed from resuming “jumbo hikes”. Unless this week’s CPI comes noticeably above expectations, 25 bps should remain the pace until a terminal rate which we see at 5.50% is hit in June.

We’ve been arguing for several weeks that the ECB should pay more attention to the collapse in the credit impulse, but our impression is that the Governing Council will remain focused on the message from core inflation in the definition of its trajectory. Even if Christine Lagarde may try not to elaborate too much on the quantum of the next moves after delivering this week the well-telegraphed 50 bps hike, given the overt disagreements within the Council, the direction of travel is clear – and it’s up. Since we expect robust core inflation over the entirety of the first half of 2023, a terminal rate at 4% would not surprise us much. The ECB would be at the hawkish end of the distribution. Other central banks, such as the Bank of Canada, also focused on the recent core inflation trend, are now pausing.

Rising Interest Rates Hurt – Who Knew?
Download the full article (581.96 KB)

Related Articles


What will it take?


Letter from China


Saved by Supply


    This website is published by AXA Investment Managers Asia (Singapore) Ltd. (Registration No. 199001714W) for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation or particular needs of any particular person and may be subject to change without notice. Please consult your financial or other professional advisers before making any investment decision.

    Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested. Past performance is not necessarily indicative of future performance.

    Some of the Services and/or products may not be available for offer to retail investors.

    This publication has not been reviewed by the Monetary Authority of Singapore.