MNI INTERVIEW: ECB Still Set For 5% Rate Peak - Wyplosz

The European Central Bank and the Swiss National Bank will still have to hike rates substantially to control inflation, despite concerns over banks, prominent Swiss economist Charles Wyplosz told MNI.

“I think that the Fed now aims to go a bit above 5%. I suspect we will have to accept something of that order in the euro area as well, and for the SNB to peak at around 3%,” said Wyplosz, who is Emeritus Professor of International Economics at the Graduate Institute, Geneva, where he was Director of the International Centre for Money and Banking.

The ECB is likely to comply with its guidance for a 50bp rate hike when it meets tomorrow, while the SNB will follow suit with its own half-point rate rise on March 23, Wyplosz said. (see MNI ECB WATCH: Turmoil Raises Doubts Over 50Bp Guidance).

“I think [the SNB] will do what they traditionally do, which is follow the ECB. The situation will be more complicated when they have higher interest rates - they may start thinking on their own - but at this stage, I expect them to just follow the ECB,” he said. “If the ECB were to change its strategy then the SNB will have to think harder than they do at this stage.”

QUANTITATIVE TIGHTENING

The Federal Reserve could slow the pace of quantitative tightening for a few weeks or months to stabilise the banking system if more problems flare, Wyplosz added, “But not yet.”

Should questions over the banking system surge in the euro area, the ECB may be forced to stop shrinking its balance sheet altogether, he said.

“The problem for the ECB is that they’re doing QT very slowly, by comparison. So you can say, ‘Well, there is less QT, so the stabilising impact of a large balance sheet is still there. They don't need to do anything.’ The problem is that if there is a banking crisis here, and there are little bombs exploding right and left, they would have to stop it completely,” Wylposz said.

“It’s not just this particular bank in the Silicon Valley. It's a generic issue. And it may happen anywhere with any bank. There is a nice story about banks, ‘Oh, they are much better capitalised.’ Yes, but if there is a run, there is a run, and no amount of capital is sufficient.” (see MNI: Swiss Will Have To Step In Over Credit Suisse-Wyplosz).