The bailout of US bank Silicon Valley Bank infected the rest of the global financial sector through sharp falls in the stock market and also took out cryptocurrency banking entities Silvergate Capital and Signature Bank.

The collapse of the Californian entity led to declines in the returns on public debt and markets are already discounting less aggressive interest rate hikes.

On the same Monday, the North American investment bank Goldman Sachs pointed out in a report that “in the face of the tension in the banking system, we do not expect more than the Federal Open Market Committee (FOMC, for its acronym in English) will introduce a rate hike at its next meeting on March 22”. Goldman Sachs does expect to see increases in the cost of money by 25 basis points in May, June and July, thus reiterating its expectation that the Federal Reserve terminal rate will stay between 5.25% and 5.5%.

Futures give a 90% probability that the Federal Reserve raises interest rates by 25 basis points next week, a sharp reversal from the 50 basis point rise they had previously expected due to strong jobs data and persistent inflation. The markets reduce their interest rate hike expectations because they expect the Federal Reserve to adopt less aggressive measures going forward in order to maintain the stability of the financial system.

According to José Lizán, manager of Retro Magnum Sicav at Quadriga AM, the key will be how long the banking crisis will be faced. “If the crisis lasts, it will mean an acceleration of the deceleration of growth, which, in turn, will contain core inflation. This will make the Fed, which was very aggressive in its last speech, choose to relax its tone. The key now will be at what level do they place the terminal rate, which may be lower than expected so far, and when the declines will start”, he indicates.

Lowering expectations of a big rate hike by the US central bank and investors’ quest for government debt security led to a sharp drop in US two-year bonds. Returns on two-year notes fell 39 basis points to 4.192%, their lowest since Feb. 3 and the biggest one-day drop since the 2008 financial crisis.

“From now on, central banks will have to ‘better measure’ their steps in combating high inflation if they don’t want to cause ‘greater harm’. In our view, it is very likely that the Fed has taken note of what happened and is choosing to act from now on, both in terms of its rate decisions and in the communications of many of its members, in a more restrained way”. , Juan José Fernández-Ficares, managing director of Link Securities.

Gilles Moëc, chief economist at fund manager AXA Investment Managers, argues that “little by little we are relearning that interest rates can hardly go up without causing pain and, however idiosyncratic, the events at Silicon Valley Bank should remind us that the channels macrofinancials should be the first to be reviewed and are likely to herald more trouble for the real economy.”

For the AXA IM expert, the SVB case could also have implications for Fed policy. “It is likely to trigger greater Fed prudence in the realm of monetary policy (…). In the very short term, it will be difficult for the Federal Reserve to ignore the SVB episode, although in theory concerns about financial stability should not affect monetary policy decisions.

The ECB takes note

The Board of Governors of the European Central Bank (ECB) meets this Thursday and is very likely to fulfill what was announced in February when its President Christine Lagarde advanced a rate hike of another 50 basis points to 3.5 % -3% in type of deposit.

The ECB will stick with its roadmap after core inflation, which excludes the most volatile elements like energy and fresh food, hit all-time highs in February at 5.6%. The general inflation rate in the euro area decreased by one tenth compared to January and in February it stood at 8.5%, according to data collected by Eurostat’s office of community statistics.

From Ibercaja, they expect that in May the issuing institute will increase the cost of money by an additional 50 basis points to approach the US level, but in June and July meetings, the ECB should slow down monetary normalization.

“For the June and July meetings, although some more ‘hawkish’ members of the ECB, such as the Governor of the Bank of Austria, have defended the need for additional increases of 50 basis points, in our opinion, it looks like a very aggressive move. Given the cooling of the economic cycle that we would be witnessingand in June the most likely would be to see an increase of 25 basis points that would take the deposit rate to 3.75%, with the rate now being terminal”, adds Cristina Gavín, head of fixed income at Ibercaja Management.

The European Commission, for its part, announced on Monday that it is “monitoring” the intervention of the Silicon Valley Bank (SVB) last Friday, although it has already warned that its presence is “very limited” in the European Union. .