London Daily

Focus on the big picture.
Saturday, Jul 12, 2025

How Silicon Valley Bank chaos has had a bearing on us all - and why we're in for a bumpy few months

How Silicon Valley Bank chaos has had a bearing on us all - and why we're in for a bumpy few months

If inflation does stay a lot higher than the central banks expect, then we could be in for a more turbulent time. And how worried should we be about that? The next few months will tell, but for the time being there's good and bad news.
Tempting as it is to believe that the chaos with Silicon Valley Bank and its British arm are of interest only to members of the tech community and financial nerds, it has already had a very real bearing on all our lives.

For evidence, look no further than the money markets, where investors bet on the future path of interest rates.

Up until last Friday, they were expecting UK interest rates to peak at around 4.75% - possibly even a little bit higher.

But the shock of the bank collapse caused a sudden reappraisal. By Monday evening, they were pricing in a peak of only 4.25% - a very big fall by the scheme of these things. It was a similar story in the US, where the expected peak for rates dropped by around half a percentage point.

Why are these two stories - interest rates and an obscure bank collapse - colliding?

In large part it's because they were always intertwined - not that anyone paid much attention before last week.

Part of the reason Silicon Valley Bank (SVB) suffered its demise was because over the past 18 months rising interest rates had caused a sharp fall in the value of bonds held by the bank.

It was, in large part, those losses and the impact on SVB's balance sheet that prompted depositors to run from the bank late last week (which in turn triggered the UK branch's collapse).

In other words, one of the consequences of SVB's implosion is that the Federal Reserve and Bank of England might become a little more wary of raising interest rates in future.

Everyone knew there were unexploded bombs in the financial system which would begin to explode when money got more expensive; the fear now is that there may be more explosions to come.

This isn't the only explanation for why rate expectations have come down. There's also the fact that the chaos at SVB, Signature bank (which also failed) and across much of the US banking system might dampen economic growth or even precipitate a recession.

And, for the most part, central banks tend to cut rates rather than raise them in the face of a recession. And we were already getting close to the potential peak in borrowing costs.

Even so, this interplay between an extremely nervous financial system and interest rates is a big part of the story.

Which brings us to some of the consequences.

'Things could get pretty gritty'

Let's assume the Fed and the Bank of England are indeed going to allow interest rates to peak at a lower rate than previously expected.

Does that mean that we have to expect higher inflation in future? What if inflation turns out to be considerably more sticky than most central banks expect (they mostly think it'll come down pretty quickly)?

The short answer is that things could get pretty gritty: the Bank of England is duty bound to try to keep inflation low and to try to keep the financial system stable, but among the many things illustrated by the SVB episode is that those two objectives can sometimes clash with each other.

In this case, higher interest rates (to fight inflation) contributed to financial instability. Yes, there was lots else going on besides - there's a strong case to say the Fed wasn't doing enough to monitor the risk posed by unusual banks like SVB - but the rising cost of money is a big part of the story.

There's good news and bad news

If inflation does stay a lot higher than the central banks expect, then we could be in for a more turbulent time.

And how worried should we be about that? The next few months will tell, but for the time being there's good and bad news.

The good is that the headline consumer price index in both the UK and US seems to have been faring more or less as the central banks expected - gradually coming down. Earlier today, the US CPI came in at an annual rate of 6% - bang in line with expectations.

The bad news is that when you look beneath the surface, there are some hints that inflation could prove more stubborn than expected.

In particular, core inflation - the behaviour of prices once you strip out volatile items like energy and food - is still building, especially when you ignore housing costs. That suggests there's still upwards pressure on prices.

And sure enough, immediately after the release of those numbers, interest rate expectations rose a little, both in the UK and US.

Now, UK rates are expected to peak not at 4.25% but 4.4% (which in practical terms means a fair few people - though not everyone - expect 4.5% rates).

In short, we're in for a bumpy few months.
Newsletter

Related Articles

0:00
0:00
Close
A 92-year-old woman, who felt she doesn't belong in a nursing home, escaped the death-camp by climbing a gate nearly 8 ft tall
French Journalist Acquitted in Controversial Case Involving Brigitte Macron
Elon Musk’s xAI Targets $200 Billion Valuation in New Fundraising Round
Kraft Heinz Considers Splitting Off Grocery Division Amid Strategic Review
Trump Proposes Supplying Arms to Ukraine Through NATO Allies
EU Proposes New Tax on Large Companies to Boost Budget
Trump Imposes 35% Tariffs on Canadian Imports Amid Trade Tensions
Junior Doctors in the UK Prepare for Five-Day Strike Over Pay Disputes
US Opens First Rare Earth Mine in Over 70 Years in Wyoming
Kurdistan Workers Party Takes Symbolic Step Towards Peace in Northern Iraq
Bitcoin Reaches New Milestone of $116,000
Biden’s Doctor Pleads the Fifth to Avoid Self-Incrimination on President’s Medical Fitness
Grok Chatbot Faces International Backlash for Antisemitic Content
Severe Heatwave Claims 2,300 Lives Across Europe
NVIDIA Achieves Historic Milestone as First Company Valued at $4 Trillion
Declining Beer Consumption Signals Cultural Shift in Germany
Linda Yaccarino Steps Down as CEO of X After Two Years
US Imposes New Tariffs on Brazilian Exports Amid Political Tensions
Azerbaijan and Armenia are on the brink of a historic peace deal.
Emails Leaked: How Passenger Luggage Became a Side Income for Airport Workers
Polish MEP: “Dear Leftists - China is laughing at you, Russia is laughing, India is laughing”
BRICS Expands Membership with Indonesia and Ten New Partner Countries
Weinstein Victim’s Lawyer Says MeToo Movement Still Strong
U.S. Enacts Sweeping Tax and Spending Legislation Amid Trade Policy Shifts
Football Mourns as Diogo Jota and Brother André Silva Laid to Rest in Portugal
Labour Expected to Withdraw Support for Special Needs Funding Model
Leaked Audio Reveals Tory Aide Defending DEI Record
Elon Musk Founds a Party Following a Poll on X: "You Wanted It – You Got It!"
London Stock Exchange Faces Historic Low in Initial Public Offerings
A new online platform has emerged in the United Kingdom, specifically targeting Muslim men seeking virgin brides
Trump Celebrates Independence Day with B-2 Flyover and Signs Controversial Legislation
Boris Johnson Urges Conservatives to Ignore Farage
SNP Ordered to Update Single-Sex Space Guidance Within Days
Starmer Set to Reject Calls for Wealth Taxes
Stolen Century-Old Rolls-Royce Recovered After Hotel Theft
Macron Presses Starmer to Recognise Palestinian State
Labour Delayed Palestine Action Ban Over Riot Concerns
Swinney’s Tax Comments ‘Offensive to Scots’, Say Tories
High Street Retailers to Enforce Bans on Serial Shoplifters
Music Banned by Henry VIII to Be Performed After 500 Years
Steve Coogan Says Working Class Is Being ‘Ethnically Cleansed’
Home Office Admits Uncertainty Over Visa Overstayer Numbers
JD Vance Questions Mandelson Over Reform Party’s Rising Popularity
Macron to Receive Windsor Carriage Ride in Royal Gesture
Labour Accused of ‘Hammering’ Scots During First Year in Power
BBC Head of Music Stood Down Amid Bob Vylan Controversy
Corbyn Eyes Hard-Left Challenge to Starmer’s Leadership
London Tube Trains Suspended After Major Fire Erupts Nearby
Richard Kemp: I Felt Safer in Israel Under Attack Than in the UK
Cyclist Says Police Cited Human Rights Act for Riding No-Handed
×