US raises interest rates, UBS takes over Credit Suisse, and other economy stories you need to read this week

The US Federal Reserve has raised interest rates by a quarter of a percentage point but indicated it is on the verge of pausing further increases. The small rise is an attempt to balance out inflation risks with the threat of banking-system instability and a potential credit crunch that could lead to a sharp economic slowdown.

The rate hike is the US central bank's ninth in a row and lifts its key interest rate to 4.75-5.00% – its highest level since 2007 and up from practically zero a year ago. But in a key shift driven by the sudden failures of Silicon Valley Bank (SVB) and Signature Bank this month, the Fed's latest policy statement no longer says that "ongoing increases" in rates will likely be appropriate.

Fed Chair Jerome Powell sought to reassure investors about the soundness of the banking system, saying that the management of SVB "failed badly" but that the bank's collapse this month does not indicate wider weaknesses in the banking system.

However, Powell admitted that Fed officials still need to see how banks might change their lending behaviour in response to the SVB and Signature collapses. "It's really ... a question of not knowing at this point," he said. "How significant will this credit tightening be, and how sustainable?"

Reuters says that the Fed's relentless rate hikes to try and rein in inflation are among the factors being blamed for the biggest banking sector meltdown since the 2008 financial crisis. In February, US regulators said the country's banks had unrealized losses of more than $620 billion on securities, underscoring the hit from rising interest rates.

JPMorgan says the banking crisis and rising interest rates mean the US appears to be heading for a recession. “A soft landing now looks unlikely, with the airplane in a tailspin (lack of market confidence) and engines about to turn off (bank lending),” its strategists said in a note to clients. “Even if central bankers successfully contain the contagion, credit conditions look set to tighten more rapidly because of pressure from both markets and regulators.”

Some of the world's largest central banks came together last weekend to stop a potential banking crisis from spreading, as Swiss authorities persuaded UBS to buy rival bank Credit Suisse in an historic deal.

UBS will buy Credit Suisse for CHF3 billion ($3.23 billion) in stock and assume up to CHF5 billion ($5.4 billion) in losses. Credit Suisse's share price slumped last week after its largest investor said it could not provide the bank with more money, prompting large falls in other banking stocks.

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The Swiss National Bank's chairman says the UBS takeover prevented "extreme consequences for Switzerland but also the global economy". The European Central Bank (ECB) described the rescue deal as "instrumental" for restoring calm, and vowed to support Eurozone banks with loans if needed.

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In a global response not seen since the height of the pandemic, the ECB also joined forces with the US Federal Reserve and central banks in Canada, England, Japan and Switzerland to bolster the flow of cash around. The banks will offer daily currency swaps – an expansion from a previous weekly programme – in what is effectively a low-risk short-term loan offering to ensure the world's major economies have adequate supply of US dollars to meet local demands.

However, the UBS takeover has not pleased distressed debt investors and corporate litigators in the US, who are preparing to fight the Swiss government over its move to write down $17bn of Credit Suisse bonds as part of the deal, The Financial Times reports.

The International Monetary Fund (IMF) board has approved a nearly $3 billion bailout for Sri Lanka. The full programme will enable the country to access up to $7 billion in funding – but IMF Managing Director Kristalina Georgieva says Sri Lanka needs to undertake various reforms in return.

Japan's core consumer inflation slowed in February, but an index stripping away energy costs hit a four-decade high, suggesting that cost-push pressures may persist longer than policy-makers thought. The core consumer price index rose by 3.1% last month from a year earlier, down from a 41-year high of 4.2% in January.

South Korea's exports plummeted by 17.4% in the first 20 days of March compared with a year earlier, with semiconductor shipments sliding by 44.7%, Bloomberg reports. The country is one of the world’s biggest exporters, and its economic health is a key indicator of trends in the global economy.

Germany's economy will shrink again in the first quarter and underlying inflation could prove to be stubborn, even if overall price growth is likely to slow sharply soon, the central bank says. This would put Europe's biggest economy into recession, after it contracted by 0.4% in the final quarter of 2022. Investor confidence in Germany has fallen for the first time in six months.

The Bank of England has raised interest rates by a further quarter of a percentage point following an unexpected rise in British inflation to 10.4% in February. Rates now stand at 4.25%, but the bank says its Monetary Policy Committee sees less urgency about maintaining its fast run of rate hikes, and that price growth is on course to fall sharply in April-June.

Nigeria's central bank is likely to extend its sharp monetary tightening as it looks to contain rising inflation, according to a Bloomberg survey of economists. Annual inflation in Africa's biggest economy rose to 21.91% in February from 21.82% in January. The bank hiked its key interest rate to 17.5% in January, from 10.5% last May.

Lebanon's central bank will begin selling unlimited amounts of US dollars in a bid to halt the spiralling devaluation of the Lebanese pound. The currency has lost more than 98% of its value since the economy began unravelling in 2019.

The failure of SVB has raised questions about financial safeguards. John Letzing, the World Economic Forum's Digital Editor, Strategic Intelligence, explores why – and how – banks are regulated.

Why do bank runs happen? They are a result of a bank facing a loss of confidence, sparking customers to withdraw deposits, this blog says. It also explores how these fears and contagion can spread from one institution to another.

Financial regulation and supervision is in the spotlight as banking turmoil intensifies in the US and Europe. Could regulation technology – or "reg-tech" – help avert banking failures? World Economic Forum Lead Editor Gayle Markovitz explores.