After rescue of First Republic, economists predict further pain with ‘new era’ of high inflation

Following the rescue of First Republic Bank by JPMorgan Chase over the weekend, leading economists predict that a prolonged period of high interest rates will expose further weaknesses in the banking sector, potentially affecting the ability of central banks to rein in inflation. Will compromise

US Federal Reserve will announce its latest monetary policy decision on Wednesday, after which European Central Bank on Thursday.

Central banks around the world have been aggressively raising interest rates for more than a year to curb sky-high inflation, but economists have warned in recent days that price pressures are likely to persist in the long run. is likely to.

The WEF’s Chief Economist Outlook report published on Monday highlighted that inflation remains a primary concern. Nearly 80% of chief economists surveyed said that central banks face “a trade-off between managing inflation and maintaining financial sector stability”, while a similar proportion expect central banks to reach their inflation targets. Expect to fight.

“Most chief economists are expecting central banks to play a very delicate dance between reducing inflation further and financial stability concerns over the past few months,” Zahidi told CNBC on Monday.

As a result, he explained, the trade-offs would be difficult to navigate, with nearly three quarters of economists expecting inflation to remain high, or central banks unable to move fast enough to bring it down to target.

First Republic Bank becomes the latest casualty Over the weekend, the third among mid-sized US banks following the sudden collapse of Silicon Valley Bank and Signature Bank in early March. this time, it was JPMorgan Chase who rode to the rescue, the The Wall Street Baron Is Winning a Weekend Auction for the troubled regional lender after being seized by the California Department of Financial Security and Innovation.

CEO Jamie Dimon claims resolution Marked the end of recent market turbulence As JPMorgan Chase acquired nearly all of First Republic’s deposits and most of its assets.

Yet several leading economists told a panel at the World Economic Forum Growth Summit in Geneva on Tuesday that higher inflation and greater financial instability are here to stay.

“People haven’t turned to this new era, that we have an era that will be structurally more inflationary, a post-globalization world where we won’t have the same scale of trade, there will be more trade barriers, And the older demographic means that retirees who are savers are not saving in the same way,” said Karen Harris, managing director of macro trends at Bain & Company.

“And we have a shrinking workforce, which requires investment in automation in many markets, so less production of capital, less free movement of capital and goods, more demand for capital. That means inflation, inflation. The impulse will be high.”

Harris said this does not necessarily mean that real inflation prints will be higher, but that it would require real rates (those adjusted for inflation) to remain higher for a longer period of time, which he said is “much higher” in “calibration”. pose a “risk”. An epoch of low rates so entrenched that torque, being used for high rates, will create failures that we have not yet seen or anticipated.”

He said it “defies logic” that as the industry tries to recover in an increasingly high interest rate environment, there won’t be further casualties from SVB, Signature, Credit Suisse and First Republic.

George Sicilia, chief economist at BBVA Group, said that after raising rates abruptly over the past 15 months, the central bank will likely “wait and see” how this monetary policy change is transmitted through the economy. However, he added that a bigger concern was potential “pockets of volatility” of which the market is currently unaware.

“In a world where leverage has been very high because you had very low interest rates for long periods of time, in which liquidity is never going to be high enough like before, you don’t know where the next problem is going to be. is,” Sicilia told the panel.

He also drew attention to the International Monetary Fund’s latest Financial Stability Report’s reference to the “interrelationship” of these areas of leverage, liquidity and volatility.

Sicilia said, “If the interconnectedness of areas of volatility does not trickle down to the banking system that generally lends, it does not need to pose a major problem and thus, the central bank continues to focus on inflation.” can keep.”

“That doesn’t mean we won’t have volatility, but it does mean it’s going to be worse down the road if inflation doesn’t come down to levels closer to 2 or 3%, and the central banks are still there.” Is.” ,