Inflation risks are here to stay

By Michael Blümke, Senior Portfolio Manager at Ethenea

The banking crisis will be forgotten relatively quickly and inflation will move centre-stage again.

The collapse of Silicon Valley Bank and Signature Bank, as well as the forced takeover of Credit Suisse by its rival UBS, sparked fears of a repeat of the banking crisis of 15 years ago. Even without looking at the pages of the newspapers, it's quite clear from the implied volatilities of traded options on the various asset classes whether a normal correction or crisis is priced in. It is interesting to note that at the moment it is the volatility in interest rates rather than equities that is causing a stir.

Whereas three years ago – due to the Covid-19 crisis - it was mainly equity market volatility that was in crisis mode, today it is the anticipated fluctuations on the bond side that are keeping investors on tenterhooks. Historically speaking, such high interest-rate volatility has tended to correspond to a VIX index at around 50-60, i.e. significantly greater equity stress. Here, however, the point is not the ostensible break in this relationship but future developments on the interest-rate front. The future course of efforts to combat inflation as well as the way in which the current banking crisis is handled are obviously important determinants. Although over the past year we have seen the fastest rate hike cycle in recent decades amid efforts to restore monetary stability, developments in recent weeks have led to a sharp fall in rates over a very short period. The high realised volatility consequently resulted in substantial expected (implied) volatility. The question, therefore, is what happens next?

The current narrative goes as follows: recent stress in the banking sector should help central banks combat inflation through a tightening of lending and credit terms for the banking sector – and small banks in particular. In other words, the tightening of financing conditions will cancel out a portion of the rate hikes necessary to bring inflation back down to the Fed’s 2% target. In light of tensions in the banking sector, markets anticipate that fewer rate hikes will be necessary – not because there won't be any inflation, but because stricter lending standards will do the job in full or in part. Against this backdrop, it is hardly surprising that investors' expectations regarding Fed and ECB monetary policy have changed dramatically. Expectations of further rate increases have been superseded by expectations of several rate cuts in a very short space of time.

The impact of the banking crisis on the real economy is overdone

However, our assessment of the situation regarding interest rates leads us to a different conclusion. The crisis among the banks will be forgotten relatively quickly and inflation will move centre-stage again. We think the impact of the banking crisis on the real economy is currently overdone.

First, we shouldn't forget that these are idiosyncratic risks that can be stemmed relatively quickly. Second, we think the measures taken by the Fed and the Treasury Department to provide liquidity, calm and, above all, confidence are sufficient. Decision makers in the U.S. have learned from previous crises and this time the response has been "big and fast". The protection afforded to all investors and the provision of liquidity have reduced the risk of an immediate bank run as well as the likelihood of a broad-based bank run on a lasting basis. To reduce future adverse impacts, the Fed has additionally created a new Bank Term Funding Program (BTFP).

In addition to the temporary discount facility, where a broad range of securities can be borrowed against at a discount to market value, the BTFP offers banks liquidity for a one-year period at the par value of U.S. Treasuries, mortgages and agency debt. What's important is that these facilities enable banks to obtain liquidity in an orderly fashion instead of having to look for funding or sell assets at a discount and realise losses, which would in turn increase the probability of a further withdrawal of deposits. To assess the impact on the real economy, it is important to understand the role played by the banks in the U.S. credit system. The crucial factor here is that bank loans account for a relatively small share of borrowing by the private sector.

Indeed small banks provide about 2% of GDP, large banks 3%, while the lion's share of loans come from the capital market and other sources. This indicates that bank lending has only a modest influence on the economy. If we take the weekly bank balance sheet data, we can also see that the financing activity of the banks had already slowed last year – that is, prior to the collapse of Silicon Valley Bank and Signature Bank. The current crisis and migration of deposits from small to big banks could accelerate the slowdown in lending by small banks; however, growth in lending by the big banks that are the beneficiaries could partly offset this. Overall, therefore, it is uncertain whether the stress in the banking sector and its implications for lending activity will cause a reduction in growth that corresponds to one or more rate hikes.

What hasn't changed, however, is the fact that inflation continues to pose a problem. The labour market remains tight, excess household and corporate savings accumulated during the pandemic still exist, and income and spending growth seems to be stabilising at well above the level that would be commensurate with inflation running at around 2%. This pressure still needs to ease significantly. Unless the current financial stress results in an abrupt slowdown in economic activity, it will be difficult for the Fed to move to a less restrictive stance – let alone reduce interest rates. If central banks are successful in stemming the risks to financial stability as planned, inflation risk could – and will – soon come back to haunt them.

Michael Blümke
Michael Blümke

Press contact

Wim Heirbaut

Senior PR Consultant, Befirm

Get updates in your mailbox

By clicking "Subscribe" I confirm I have read and agree to the Privacy Policy.

About Ethenea

ETHENEA offers a wide range of attractive investment opportunities for different investor profiles: risk-minimised, balanced and equity-focused.

Capital preservation and the achievement of stable long-term returns are key components of the investment philosophy of the Ethna Funds. The fund management consistently realises this objective through active management and flexible asset allocation across various sectors and asset classes.

ETHENEA wants to make a contribution and offer responsible and sustainable investment solutions. Therefore, ESG criteria are an important part of the investment processes of all Ethna Funds (Article 8 SFDR).

Further information and legal information can be found at


PRESS RELEASE – not an official document

We would like to point out that all data and information made available to you has been thoroughly researched by ETHENEA. However, with regard to its correctness and completeness, we cannot assume any liability or warranty for damages incurred either by the recipient of this information or by third parties, either directly or indirectly. In the event that this text is published in any form and to any extent, the publishing entity (editorial office of the newspaper or associated or commissioned third parties, website, podcast, etc.) is obliged to include the necessary disclaimers and legal notices. In addition, in this context, we refer to our legal information: The information contained in the attached document does not constitute a solicitation, offer or recommendation to buy or sell units in the fund or to engage in any other transaction.  It is intended solely to provide the reader with an understanding of the key features of the fund, such as the investment process, and is not deemed, either in whole or in part, to be an investment recommendation. The information provided is not a substitute for the reader's own deliberations or for any other legal, tax or financial information and advice. Neither the investment company nor its employees or Directors can be held liable for losses incurred directly or indirectly through the use of the contents of this document or in any other connection with this document. The currently valid sales documents in German (sales prospectus, key information documents (PRIIPs-KIDs) and, in addition, the semi-annual and annual reports), which provide detailed information about the purchase of units in the fund and the associated opportunities and risks, form the sole legal basis for the purchase of units. The aforementioned sales documents in German (as well as in unofficial translations in other languages) can be found at and are available free of charge from the investment company ETHENEA Independent Investors S.A. and the custodian bank, as well as from the respective national paying or information agents and from the representative in Switzerland. The paying or information agents for the funds Ethna-AKTIV, Ethna-DEFENSIV and Ethna-DYNAMISCH are the following: Austria, Belgium, Germany, Liechtenstein, Luxembourg: DZ PRIVATBANK S.A., 4, rue Thomas Edison, L-1445 Strassen, Luxembourg; France: CACEIS Bank France, 1-3 place Valhubert, F-75013 Paris; Italy: State Street Bank International – Succursale Italia, Via Ferrante Aporti, 10, IT-20125 Milano; Société Génerale Securities Services, Via Benigno Crespi, 19/A - MAC 2, IT-20123 Milano; Banca Sella Holding S.p.A., Piazza Gaudenzio Sella 1, IT-13900 Biella; Allfunds Bank S.A.U – Succursale di Milano, Via Bocchetto 6, IT-20123 Milano; Spain: ALLFUNDS BANK, S.A., C/ Estafeta, 6 (la Moraleja), Edificio 3 – Complejo Plaza de la Fuente, ES-28109 Alcobendas (Madrid); Switzerland: Representative: IPConcept (Schweiz) AG, Münsterhof 12, Postfach, CH-8022 Zürich; Paying Agent: DZ PRIVATBANK (Schweiz) AG, Münsterhof 12, CH-8022 Zürich. The paying or information agents for HESPER FUND, SICAV - Global Solutions are the following: Austria, Belgium, France, Germany, Luxembourg: DZ PRIVATBANK S.A., 4, rue Thomas Edison, L-1445 Strassen, Luxembourg; Italy: Allfunds Bank S.A.U – Succursale di Milano, Via Bocchetto 6, IT-20123 Milano; Switzerland: Representative: IPConcept (Schweiz) AG, Münsterhof 12, Postfach, CH-8022 Zürich; Paying Agent: DZ PRIVATBANK (Schweiz) AG, Münsterhof 12, CH-8022 Zürich. The investment company may terminate existing distribution agreements with third parties or withdraw distribution licences for strategic or statutory reasons, subject to compliance with any deadlines.