This is an audio transcript of the FT News Briefing podcast episode: ‘Banking crisis complicates interest rate decisions

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, March 22nd, and this is your FT News Briefing.

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The International Monetary Fund has struck a deal with Ukraine. The Federal Reserve could pump the brakes on interest rate rises. And shares in the troubled First Republic Bank rallied yesterday. Plus, Xi Jinping met with Vladimir Putin. The FT’s Max Seddon says Xi was being a bit noncommittal about a key gas pipeline.

Max Seddon
China can drag this out as long as they want until they’ve extracted the absolutely most favourable conditions for them from Russia possible.

Marc Filippino
I’m Marc Filippino and here’s the news you need to start your day.

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Ukraine will get a 15 and a half billion dollar loan thanks to a deal with the IMF. The International Monetary Fund announced it yesterday and it said the first year to 18 months of the loan program will be devoted to “fiscal, external, price and financial stability”. It will focus on increasing tax collection and put more reliance on domestic debt markets instead of monetary financing. The second phase of the IMF deal will last four years. It will focus on recovery and early reconstruction as Ukraine tries to become part of the European Union. The IMF still needs to approve the deal, which is expected to happen in the next few weeks.

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The Federal Reserve is coming out with an interest rate decision today, and there’s chatter that the Fed might leave interest rates unchanged. Now, if that happens, it would be a huge shift from the approach the central bank has taken over the past year. And former central bankers are divided on whether an interest rate pause is the right call. Here’s the FT’s Claire Jones.

Claire Jones
Well, there’s one camp that thinks the central bank should keep on raising rates. Their arguments can be broadly summarised in two ways. First of all, they argue that inflation still remains very high. Far higher than central banks would like. So they have to instil this idea in the public mindset that they really wanna get price pressures under control. They also say this camp that if the central banks pause now, it might do more harm than good in terms of the banking turmoil. The reason being that if central bankers go soft on inflation, people might assume that they know something about the dangers lurking in the banking system that others don’t.

Marc Filippino
And what about the other camp, Claire?

Claire Jones
Well, the other camp’s views is that, you know, you really wanna see what’s happened in the banking sector in recent weeks. As a warning signal, Claudia Sahm, a consultant and former Federal Reserve economist, she said a group of us already thought the Fed was going too hard, too fast, that the Fed is going to break something. Well, they did. So they see the instability in the banks as something that is a direct consequence of tighter monetary policy. And while inflation might not be back to target yet, it shows that central banks may well have done enough to constrain credit to a point where demand will weaken and inflation will eventually fall to target.

Marc Filippino
Why is there such a big debate considering the European Central Bank last week just raised rates as this banking turmoil was going on? I mean, it’s only a week later.

Claire Jones
You know, we need to remember a few things there. The first is that rates in the eurozone are lower than those in the US and in the UK. So the Bank of England and the Fed have done more tightening than the ECB has already. The other issue there is since the ECB decision, we’ve seen the collapse of Credit Suisse too, and the problems at First Republic Bank be exacerbated. So those tensions haven’t really gone away. But I think it is a good point really, that, you know, the ECB was able to do a half point rise without that causing that much in terms of market disturbances. So I think that probably would make policymakers in the US and the UK more confident about raising rates should they choose to do so.

Marc Filippino
Claire Jones is the FT’s international economy news editor. Thanks, Claire.

Claire Jones
Thanks, Marc. Pleasure.

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Marc Filippino
Shares in First Republic Bank rallied yesterday. They ended up 30 per cent. The rally came after US Treasury secretary Janet Yellen signalled that the government would bail out smallish banks like First Republic if necessary, the way they did with Silicon Valley Bank when it collapsed. Investors had been worried that First Republic would suffer contagion from the SVB implosion and see a run on deposits. And Yellen yesterday offered a bit of a safety net.

Joshua Franklin
So I think anything that could reassure deposit holders at First Republic and other regional banks that their deposits are safe will be beneficial to them.

Marc Filippino
That’s the FT’s US banking editor, Joshua Franklin.

Joshua Franklin
It points to the fact that Janet Yellen and other senior officials in the US government know we’re not out of the woods yet in terms of what’s going on with US banks right now. That they’re still feeling the need, even after the actions that they’ve taken, after the new lending capacity that the Fed has announced. They’re still feeling the need to come out with remarks like this to try to reassure investors and more importantly, deposit holders at these banks that their money is safe and the US government stands ready to support them.

Marc Filippino
Despite yesterday’s rally, First Republic Bank is still down more than 80 per cent since the Silicon Valley Bank crisis started. Josh says that it would take a lot for First Republic to turn things around.

Joshua Franklin
First Republic, as it exists today is a very, very different bank than it was a month ago before this all started. The credit rating for the bank’s debt has been cut down to junk rated, so that means its borrowing costs have gone up. It’s lost tens of billions of dollars in deposits. It’s about 40 per cent of their overall deposits. That’s the cheapest source of funding that these banks have. It’s not an easy path to rebuild its credit rating, to rebuild its deposit base. And I think crucially as well, just to show that it can be a profitable company going forward. I think part of the things that you see around the gyrations in the share price over the last week or so has been people are just not sure what First Republic as a stock, as an investment is worth these days because there’s very, very limited data that you actually see about the financial performance of the bank. And I think, you know, that’s something that, you know, in first-quarter earnings and investor updates that hopefully we’ll get a better picture of in the weeks ahead.

Marc Filippino
Joshua Franklin is the FT’s US banking editor.

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China’s president, Xi Jinping, went to Moscow this week with a peace plan meant to end the war in Ukraine. But when the talks between Xi and Russian president Vladimir Putin ended yesterday, it didn’t look like the two sides came up with a solution. Instead, the FT’s Max Seddon says China just reiterated its support for Russia.

Max Seddon
Well, China is essentially completely backing Russia’s position on Ukraine. They’re not supplying Russia with weapons. But rhetorically, diplomatically, China is completely behind Russia. And you saw that in the joint statement that Xi and Putin signed after their talks yesterday. It is carefully worded in a way that makes China look as unbiased and neutral and fair as possible. But when it’s Vladimir Putin is the one who’s going to China that it makes it pretty clear that what China’s done is essentially back the Russian position, which is that it wasn’t Russia’s fault this war started. They were provoked by Nato and it’s not Russia that is the impediment at the talks. This is why this peace plan is a non-starter. It’s more an attempt to, you know, help give Russia some backing to continue the war and to make China look like a peacemaker. Then it is a real serious attempt at peace because Xi hasn’t called Volodymyr Zelenskyy, the Ukrainian president, once since the war began. So very much, you know the mood music was very much that China continues to be behind Russia on all things Ukraine.

Marc Filippino
Max, there was some discussion over a pipeline that would take gas from Russia to China. How did those talks go and why do they matter?

Max Seddon
The reason this pipeline is so important is this would be the first pipeline going from those major gasfields in the Yamal region, in Russia, all the way to China via Mongolia. And Putin was talking about it yesterday as if it was basically a done deal. But then you started reading the tea leaves. It became pretty clear, you know, he said, oh, we’ve agreed everything with Mongolia, which is the third party to the deal. But he didn’t say that he agreed anything with China. And Russia’s top energy official said that, you know, maybe the optimistic scenario for Russia is they get it done by the end of the year.

Marc Filippino
Max, why didn’t China just commit there? Why drag it out?

Max Seddon
China doesn’t need this extra 50bn cubic metres of gas from Russia, nearly as much as Russia needs to find somewhere to sell it. And that means China can drag this out as long as they want, until they’ve extracted the absolutely most favourable conditions for them from Russia possible. We are seeing last year Russia-China trade was $190bn. Putin said it’s going to exceed 200bn, which would be another record. But it’s very much so far out of self-interest economically, especially on the Chinese side, rather than as the result of the buddy buddy relationship between Putin and Xi. The diplomatic bro out is not really trickling down to the economic level, certainly not as much as Russia would like.

Marc Filippino
Max Seddon is the FT’s Moscow bureau chief.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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