- The banking fiasco will help the Federal Reserve curb inflation, the IMF’s managing director says.
- “The skirmishes in the banking sector are actually helpful,” Kristalina Georgieva said Thursday.
- The turmoil will cause a tightening of credit conditions that slows price growth, she added.
There is no banking crisis – and unease in the sector will help the Federal Reserve to cool inflation, the head of the International Monetary Fund says.
Kristalina Georgieva said Thursday that last month’s turmoil will aid the Fed in its war on soaring prices by leading to a tightening of credit conditions, as mid-sized banks try to shore up their balance sheets by raising their lending standards.
“The skirmishes in the banking sector are actually helpful because they do lead to medium-sized banks being more careful in their lending practices,” the IMF managing director told CNBC’s “Squawk on the Street.”
“They provide 30% to 40% of financing, meaning they are helping the Fed by being more prudent for the Fed not to have to do that much,” she continued. “It has been a helping hand to the Fed.”
Inflation tends to cool when credit conditions tighten. Consumers and businesses find it harder to access cash, which leads to lower levels of spending and investment — key components of overall demand in the economy and drivers of price growth.
Silicon Valley Bank’s collapse in March sparked widespread panic across the US regional banking sector, and dragged down the stock prices of similarly sized institutions like First Republic and Western Alliance.
The California lender ran into trouble after it sold long-dated bonds at a loss and moved to raise fresh capital. The scramble for cash spooked its customers, resulting in a tidal wave of withdrawals that overwhelmed the bank and spurred the Federal Deposit Insurance Corporation to seize control and guarantee all of its deposits.
But Georgieva said she didn’t view last month’s fiasco as a crisis. Some turmoil was to be expected after the Fed hiked borrowing costs from near-zero to around 5% in the space of a year in a bid to tame soaring inflation, she said.
“I don’t think there is a banking crisis, there are vulnerabilities that we should have expected,” she told CNBC.
“Let me say that we have lived through a long period of very low interest rates and ample liquidity and very quickly we moved into high interest rates and restrictive liquidity,” Georgieva added. “Of course there would be vulnerabilities to be exposed.”
The IMF isn’t the first high-profile institution to predict the banking turmoil will lead to lenders pulling back on financing. However, other market forecasters have underscored the impact a credit crunch would have on economic growth, rather than inflation.
Allianz said late last month that the US is now “headed towards a crash landing,” with SVB’s collapse heralding a credit crunch that could plunge the economy into a severe recession.