«Prices have run too long, the ECB’s hike is a courageous action»- Corriere.it

«The ECB’s rate hike of 0.5% is a courageous choice, supported by solid economic considerations according to which, in this context, interest rate policy should be directed towards controlling inflation and other tools for financial stability. The ECB was right not to mix the two. I hope it will be an example for the decisions of the Fed next week», says Mohamed El-Erian, president of Queens’ College in Cambridge and advisor to Allianz.

Why is inflation so persistent on both sides of the Atlantic?

“The initial push of inflation has been allowed to linger too long and, as a result, has migrated from some products to the services sector via the goods sector as a whole. This transition makes inflation stickier and less sensitive to interest rate hikes.

What is happening to the banking sector?

«The volatility of the banking system is due to four main factors. First, the drastic change in the global interest rate regime, mismanaged mainly by the Fed. Second, the amplifying impact of economic fluidity by an excessive level of policy-induced volatility monetary, due to inconsistent reporting by the Fed. Third, the pre-existing vulnerabilities of some banks such as SVB and Credit Suisse. Finally, and in particular in the case of Svb, the considerable delays in supervision”.

Did Svb’s failure surprise you?

“Like many others, I was unaware of Svb until last week. She went under the radar screen, not only of the Fed, but also of the US Treasury, as Secretary Yellen noted ».

Will the liquidity provided by the Swiss National Bank be enough to save Credit Suisse?

“It should be sufficient to handle liquidity stress. It does not resolve issues related to Credit Suisse’s business model.”

Do you expect more bad news from the banking sector, as BlackRock CEO Larry Fink anticipated?

“I’m also concerned about the non-banking sector. We could see some small financial crash, for the same reasons mentioned above.

The US authorities reacted very quickly and President Joe Biden reassured on TV that all deposits in the SVB will be protected, even uninsured ones. Is it “moral hazard”?

«In the strict sense yes, but with an important caveat. I am less concerned about moral hazard in the case of deposits which, in fact, are now fully guaranteed in all US banks. After all, it is not reasonable to expect depositors to do the necessary thing due diligence. I’m concerned about moral hazard in the case of unsecured stocks and bonds.’

Do you think the market volatility will continue?

«Yes, because the intrinsic fluidity of the economic situation is amplified by the volatility induced by monetary policies. Suffice it to look at the trend in US yields over 2 years, a fundamental element for liquidity management. And think to what extent, in just the last few months, the “conventional wisdom” about the American economy has gone from a soft landing to a hard landing to a no-landing and now back to a hard landing.

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