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Why a banking crisis is similar to a rate hike

Why a banking crisis is similar to a rate hike

The central banks’ decision to reduce the rate of hikes is mainly due to two factors. First, it’s a fairly simple and obvious explanation. The second one gets mentioned in passing, but few articles delve into it, because it’s a bit complicated.

Now that there appears to be a second round of worries over the banking system, it’s worth understanding this second issue. Especially if, as last time, the banking issue doesn’t lead to an immediate market collapse and investor attention turns elsewhere. After all, the ECB, Fed and BOE are all saying the banking system is well capitalized, and there isn’t anything to worry about. Why are they citing banking conditions as a reason to not raise rates?

The effect of bank rates

You probably already know that central banks regulate the money supply through the interest rates they charge to regular banks. In turn, this causes banks to charge different interest rates to their clients. It is believed that higher interest rates will make people less likely than before to borrow, reducing the amount of money available. The lower the interest rates, the more willing people are to borrow. This increases the money supply.

What the latest crisis…

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