In view of continued high inflation but a deepening downturn, falling consumption, declining investment, a potential increase in systemic credit risk and the emerging risk of a kind of domino effect of liquidity loss and bankruptcies of successive commercial and investment banks, should central banks anti-inflationarily continue to raise interest rates or should they rather stop tightening monetary policy so as not to deepen the downturn in the economy?

The recent bankruptcies of the sizable investment banks Silicon Valey Bank and Signature Bank, which had placed a significant portion of their financial assets in low-interest government bonds prior to the pandemic and financed business ventures with high levels of investment and credit risk, have increased systemic credit risk and inspired renewed consideration of the effectiveness of improving the banks' credit risk management process. Once again, discussions returned to the issue of the level of effectiveness of the improvement of the credit risk management process carried out in banks and the resolution of the issue of the scale of improvement of credit procedures and investment in securities, credit risk analysis, the process of reliably and not fictitiously as in many banks just before the global financial crisis of 2007-2009 carried out analysis of the creditworthiness of a potential borrower and the credit risk of the bank, reliable recommendations and ratings for securities and derivatives offered to clients and investors by investment and commercial banks, and an efficient credit risk management process, taking into account the adjustment of credit activity procedures to technological progress and changing legal norms relating to the activities of banks. In view of the above, the question arises as to what central banks should do now and in the following months and quarters with regard to interest rates? Should central banks continue to raise interest rates, acting on assumption mainly as an anti-inflationary measure, but taking the risk of deepening the downturn, which may result in further bank failures and increased unemployment, or should they do the opposite, i.e. stop tightening monetary policy in order to help the economy return to a better economic situation? Since the legal norms governing the central bank in the USA, i.e. the Federal Reserve Bank, include within the strategic objectives of monetary policy making not only the care of the value and stability of the national currency, but also the support of the government's economic policy to prevent a significant rise in unemployment, it is unlikely that monetary tightening will continue on a significant scale in the coming months and quarters. In addition to this, according to the forecasts of most financial analysts, economists and think tanks of banks and other institutions, inflation should gradually decline in the following quarters starting from the second quarter of 2023. Consequently, the pressure on central banks to continue raising interest rates in the coming months will also decrease.

In addition to this, what also matters globally is the possible synergy and symmetry in terms of a specific monetary policy strategy pursued by other central banks as well, including, among others, the European Central Bank. In a situation where the possible development of a financial crisis would probably not only involve US banks, the aforementioned synergy and symmetry of an easing monetary policy would be advisable. Already in March 2023, the problems of one of the largest banks in Switzerland, Credit Suisse, confirmed the aforementioned thesis that the possible development of a financial crisis would probably quickly involve the banking systems of many countries, including in Europe.

In view of the above, I address the following question to the esteemed community of scientists and researchers:

In view of still high inflation but a deepening downturn, a decline in consumption, a decline in investment, a potential increase in systemic credit risk and the emerging risk of a kind of domino effect of liquidity loss and bankruptcy filings by successive commercial and investment banks, should anti-inflationary central banks continue to raise interest rates or should they rather stop tightening monetary policy so as not to deepen the downturn of the economy?

What anti-crisis monetary policy should central banks adopt when inflation is high and the economy is weak?

What do you think about it?

What is your opinion on this subject?

Please respond,

I invite you all to discuss,

Thank you very much,

Best wishes,

Dariusz Prokopowicz