Central Banks are on the verge of declaring the yearlong interest-rate hiking cycle over. The reason: Banks have taken the wheel and are pressing the brakes.
Federal Reserve Chair Jerome Powell laid the groundwork at his March 22 FOMC press conference. When asked about tightening credit conditions, he responded, "we think it's potentially quite real and that argues for being alert as we go forward, as we think about further rate hikes for us, we'll be paying attention." That's code for clear evidence that policymakers expect tighter financial conditions to replace the blunt instrument they’ve wielded for the past year or so.
As night follows day, higher interest-rate costs are putting potential corporate and private borrowers off, and many are repaying back debt if possible. While the global banking system remains awash in liquidity -- and central banks have already fallen over themselves to keep the taps fully open — a worrisome scare over bank deposit security and a reluctance to take on debt constitute the makings of a credit crunch.
The signs will soon start emerging. Next week, we get the Bank of England credit conditions survey, and a month later its quarterly monetary policy review. The end-2022 summary showed UK lenders the most wary since the global financial crisis. The European Central Bank’s quarterly bank-lending survey is due toward the end of April, sufficiently ahead of its May 4 gathering. The January report showed euro loan growth turning negative in some southern countries. The next Fed Senior Loan officer Survey is not due until May 8, almost a week after the FOMC meeting, but policymakers will have a comprehensive overview of its likely conclusions.
As my colleague Paul Davies wrote last month following three US bank failures, "at a certain point, bank stability is monetary policy...tightening is accelerating like a slingshot through the banking system. Like an elastic band it stretches until it snaps back all at once.” The collapse of Credit Suisse Group AG into UBS Group AG's arms has emphasized problems with bank balance sheets is not a localized US problem. Daniel Kral, senior economist at Oxford Economics, tweeted that the last time credit flow dropped this sharply was during the euro crisis a decade ago.
