Take Two: Fed raises rates and signals one further hike, ECB says outlook blurred by banking woes

What do you need to know?

The US Federal Reserve (Fed) raised interest rates by 25 basis points (bp) to 4.75%-5% and continued to signal one further hike despite continued uncertainty around the banking sector turmoil. The central bank indicated one further rate increase is likely in 2023, shifting from the previous guidance of “ongoing increases” for the first time in a year. Fed Chair Jerome Powell said the collapse of Silicon Valley Bank did not represent broader weakness in the banking system, which he described as “sound and resilient”. He added though that recent events were likely to result in tighter credit conditions, which could have “a significant macroeconomic effect,” and stated that this expectation had resulted in the Committee not signalling even more hikes ahead.

Around the world

Inflation remains a key concern for central banks. European Central Bank (ECB) President Christine Lagarde indicated the ECB will take a “robust” approach to future rate-setting and remain ready to act as it awaits “clear evidence that underlying inflation is trending downwards”. However, Lagarde acknowledged banking sector upheaval has made the outlook “blurrier”.  Meanwhile the Bank of England raised its policy rate by 25bp to 4.25%, as anticipated, while UK annual inflation unexpectedly increased for the first time in four months, to 10.4% in February from 10.1% in January, largely driven by rising food costs.

Figure in focus: $3bn

The International Monetary Fund (IMF) approved a $3bn loan for Sri Lanka, in an attempt to “restore macroeconomic stability and debt sustainability” within the country. Through its Extended Fund Facility mechanism, the IMF will initially disburse $333m, with more to follow over the coming months. Sri Lanka has long been engulfed in a financial crisis, characterised by unrest and chronic shortages of basic goods, after foreign exchange reserves plummeted. The IMF said the four-year arrangement is expected to catalyse financial support from other development partners to help “unlock Sri Lanka’s growth potential” and aid its recovery.

Words of wisdom:

Sustainable Aviation Fuel: A biofuel that has similar chemical properties to conventional aviation fuel but with potentially sharply lower greenhouse gas emissions. Sustainable Aviation Fuels (SAFs) are currently relatively costly and hard to come by, but some airlines have purchased large orders and one carrier has earmarked a small part of every ticket sold to help cover the extra costs. The fuels can be made using cooking oil, municipal waste or woody biomass, and one report last week suggested the European Union is considering setting SAF usage targets from 2030 for any airline seeking to receive a green label.

What’s coming up

The closely watched Ifo Business Climate index is published Monday. The German measure hit an eight-month peak of 91.1 in February, from a downwardly revised 90.1 in January. The latest S&P/Case-Shiller US Home Price benchmark lands on Tuesday while Thursday sees a wave of Eurozone opinion measures released, including the latest Economic, Services and Industrial Sentiment indices. A final estimate for fourth quarter US GDP growth is published Thursday and the Eurozone announces flash inflation data for March on Friday; February saw the bloc’s Consumer Price Index fall to 8.5% on annual basis, its lowest since May 2022.