The turmoil at Silicon Valley Bank and Credit Suisse could hit the UK economy if it causes a persistent jump in bank funding costs, a Bank of England policymaker warned.
(Bloomberg) — The turmoil at Silicon Valley Bank and Credit Suisse could hit the UK economy if it causes a persistent jump in bank funding costs, a Bank of England policymaker warned.
Silvana Tenreyro, an external member of the Monetary Policy Committee, said it will become clear in the “coming weeks and months” whether the turmoil will cause credit conditions to tighten, and that a big change might force the central bank to respond.
The remarks add to concerns that investors have been spooked by the controversial wipeout of Additional Tier 1 bonds at Credit Suisse during the takeover by USB AG. That episode threatens to drive up funding costs for banks across Europe and reduce the amount of money available to be loaned out.
“The recent banking sector impact of the failure from Silicon Valley Bank and the UBS takeover of Credit Suisse could affect the UK economy if they have a persistent impact on bank funding costs, which would be through credit conditions in the UK,” Tenreyro said Wednesday on a panel in Glasgow at the Royal Economic Society and Scottish Economic Society annual conference.
“It will become clear in the coming weeks and months,” she said. “But if that is the case, the MPC will take those effects into account in its forecasts and set policy accordingly.”
Tenreyro is one of the most dovish policymakers at the BOE and laid out the case on Tuesday for a reversal of recent rate rises. She warned the UK faces a “significant inflation undershoot” after the BOE lifted its key lending rate to 4.25%.
Huw Pill, the BOE’s chief economist, also cautioned on Tuesday that rate-setters will need to keep a close watch for any signs of tightening financial conditions and “be prepared to respond to the macro implications of any dislocation to credit markets.”
Analysts have predicted that central bank policy could be forced to react to the turmoil as lower lending would weaken the economy and drag on inflation.
“With global banking stress on the rise, financial conditions will take on added importance for policymakers in calibrating monetary policy,” said Sanjay Raja, economist at Deutsche Bank.
“An excess and unwarranted tightening in financial conditions could lead to a bigger than intended loss in output which, in turn, could weigh on inflationary pressures further and faster than previously anticipated,” Raja said.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.