According to financial experts, the latest banking turmoil is unlikely to have any consequences for the economy in Germany, the euro zone and the USA.
However, according to a new study by the Mannheim-based economic research institute ZEW, the major central banks could be more cautious in tightening their monetary policy due to the tensions in the financial sector. The key interest rates had recently been increased significantly in order to curb inflation.
“The recent stresses in the banking system are likely to have a limited economic impact, both in terms of intensity and duration. However, they may be enough to make monetary policy from the European Central Bank (ECB) and the Federal Reserve (Fed) slightly less aggressive in the coming months,” said Thibault Cézanne from the ZEW Research Department Old-Age Provision and Sustainable Financial Markets. Central banks may put more emphasis on financial stability than on fighting inflation in the short term.
Next interest rate decision is imminent
In March, the Silicon Valley Bank and several regional banks collapsed in the USA, triggering shock waves on the financial markets. The main reason for the turbulence was rising interest rates on the capital markets. Shortly thereafter, Credit Suisse had to be rescued by an emergency takeover by the major Swiss bank UBS.
Despite the turbulence in the banks, the European Central Bank had further increased interest rates in mid-March. The next interest rate decision is due next Thursday (May 4). The bank turbulence had recently clouded the ZEW economic expectations. With the strong outflow of customer funds at the US regional bank First Republic, the uncertainty continues to smolder.
In the ZEW survey of 172 financial experts, around 54 percent expect that there will be no changes in German gross domestic product over the next six months as a result of the banking turmoil. 43 percent expect a slightly negative impact. Inflation is also likely to remain almost unaffected by the tensions over the next six months, say the experts.
Distance from more aggressive interest rate policy
Looking ahead to the next two years, around three quarters believe that there will be no impact on German gross domestic product and inflation. The picture is therefore similar for the euro area. However, around 46 percent expect a slightly negative impact on the ECB’s main refinancing rate in the next six months.
According to the financial experts, the short-term effects of the turbulence on the banks are more likely to be felt in the US economy. Around 46 percent and 45 percent of those surveyed expect that the impact on gross domestic product will be zero or slightly negative in six months.
However, a narrow majority (52 percent) expect the Fed to adopt a slightly less tight monetary policy in the short term. The US Federal Reserve had moderately increased the key interest rate recently, but refrained from a more aggressive interest rate policy.
