Aggressive interest rate increases will probably have to be undone, even at the cost of accepting higher medium-term inflation, writes Gerwin Bell.
in the US and globally have been caught by surprise in recent weeks. Financial sector stress dwarfed positive economic data. This illustrates two things – last year’s aggressive monetary policy rate rises have created unintended consequences, and the financial sector is a key conduit for recessions.
Of course, the value of these bonds – many acquired during rock-bottom interest rates – fell as interest rates rose. It is a mystery that even though central banks had telegraphed historically large and fast rate hikes, management and regulators of these failed banks apparently ignored this basic bond maths and the adverse implications for asset valuations and capital buffers.
has been a huge problem for banks. This is not just when it comes to valuation losses on their bond portfolio, but also in their very core business of maturity transformation: borrowing short and lending long.
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