We will need to hear more from the Bank if a credit crunch follows this banking ‘crisis’
Well, you can’t say he laboured the point. Andrew Bailey limited his commentary on the banking crisis / gentle banking wobble to just one paragraph in his speech last night at the London School of Economics, but he made himself clear enough: further rate hikes are on the way unless something dramatic changes in the UK banking sector.
The logic, to his credit, is difficult to argue with. The Bank of England and politicians have been at pains to say over recent weeks that the UK’s banking system is robust; Bailey’s folksy phrase is that they are “safe and sound.” The combination of guardrails put in place after the financial crisis and the fact that no UK bank has been quite as badly run as Credit Suisse in recent years has served us all well.
There were calls for Bailey and his colleagues on the Monetary Policy Committee to press pause on interest rate hikes to assuage concerns about the effect of rapid rate hikes on the banking sector.
They were right not to; there are very compelling reasons not to keep hiking interest rates, but a jittery market is not one of them. It would have indicated to any observer with a healthy dose of cynicism that the Bank knew more than it was letting on.
Last night’s confirmation helps to set City expectations, which Threadneedle Street has finally clocked is a better idea than the will-they-won’t-they guessing games of 2021.
But as is pointed out elsewhere in this paper, the real issue might not be rates, but whether banks keep lending. It stands to reason that if there is still nervousness in the system, lending will come in. That’s bad news for the real economy, obviously, and not ideal for investors either. Andrew Bailey’s speech yesterday – 15,000 words of perfectly interesting economic pontificating with one rather important paragraph at the end – will not be the last the Governor is to say on the state of our banking system.