Persistent inflation means Central Banks have to stick with interest rate hikes

This week it was business as usual for central banks, as the Bank of England and the US Federal Reserve both raised interest rates by a quarter percent. This came despite ongoing struggles in some US regional banks and the saga of Credit Suisse and its acquisition by UBS. While most UK and European banks are in decent shape they are struggling with bond markets where short-term bonds pay more interest than long-term ones, opposite to a bank’s typical business model. Trying to keep deposit rates low for savers is causing money to leave bank accounts for better returns elsewhere, which is broadly the problem currently plaguing the system.

Elsewhere, inflation in the UK surprised to the upside, following a third monthly rise in core inflation in the US, suggesting it isn’t possible to start cutting rates yet. With core inflation looking like it won’t budge until wages start falling, some sort of recession that increases unemployment now looks like the only remaining strategy. How already struggling banks cope with that as well is the dilemma policy makers will have to grapple with.

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