Americans raise interest rates to highest level in 16 years despite banking unrest | Economy

By our economics editors

Mar 22, 2023 at 7:23 PMUpdate: 5 minutes ago

The US central bank raised its key interest rate by 0.25 percentage point on Wednesday evening, to a range of between 4.75 and 5 percent. That is the highest level since 2007. The Federal Reserve is continuing to raise interest rates, despite turmoil in the banking sector following two bankruptcies earlier this month. Last week, the European Central Bank (ECB) also raised interest rates despite the banking unrest.

In recent weeks, experts in the United States, as in Europe, have expressed doubts about the desirability of an interest rate hike by the central bank. With such an interest rate increase, central banks try to fight inflation. Higher interest rates make borrowing more expensive and making spending less attractive. That slows down inflation.

But in recent weeks there has been a lot of unrest in the banking sector in the US and Europe. Earlier this month, two regional banks in the US went bankrupt, partly due to higher interest rates. These were the Silicon Valley Bank (SVB) and the Signature Bank. The Fed, together with eleven major banks, also had to intervene to prevent the bankruptcy of the regional First Republic Bank.

The banks lent a lot of money to tech companies in Silicon Valley. But those companies massively withdrew their money from the banks because they doubted whether those banks were financially sound. It resulted in a bank run, which killed SVB and Signature.

The ECB also raised interest rates despite the banking unrest

Last week, the ECB already decided to raise interest rates from 2.5 percent to 3 percent. Analysts doubted whether it would be a good idea, especially because of the unrest surrounding Credit Suisse. The Swiss bank was in serious trouble and had to be bailed out by the Swiss government and competitor UBS. That rescue calmed the European stock markets.

ECB President Christine Lagarde said on Wednesday that he wanted to continue with rate hikes to lower inflation in Europe to the desired 2 percent.

An interest rate hike is also expected in the United Kingdom on Thursday. Inflation there rose sharply again in February to 10.4 percent, considerably higher than expected.

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