How Silicon Valley Bank chaos has had a bearing on us all – and why we’re in for a bumpy few months
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.
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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)?
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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.
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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.
Retail sales rose a surprising amount in July, as good weather and the Women’s Euros led people to part with their cash, official figures show.
The amount of spending rose 0.6% in July, according to figures from the Office for National Statistics (ONS), far above the 0.2% rise anticipated by economists polled by Reuters.
In particular, clothing and footwear stores, as well as online shopping, experienced strong growth.
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When looked at on a three-month basis, the numbers are weaker, with a 0.6% fall in sales up to July due in part to downward revisions in June.
Spending has declined since March, when supermarkets, sports shops, and household goods saw strong sales at the beginning of the year as warm and sunny weather pushed summer purchases earlier. Though compared to a year ago, sales are up 1.1%.
Fans gather during a Homecoming Victory Parade in London after England’s win in the final of the Women’s Euros. Pic: PA
Retail sales figures are significant as they measure household consumption, the largest expenditure in the UK economy.
Growing retail sales can mean economic growth, which the government has repeatedly said is its top priority.
A problem with the figures
These figures were originally due to be published in August but were delayed by two weeks so the ONS could carry out “quality assurance” checks.
Following the checks, the statistics body found a “problem”, which meant it had to correct seasonally adjusted figures.
It hasn’t been the only question mark over the reliability of ONS figures.
In March, UK trade figures were delayed due to errors from 2023, and the office continues to advise caution in interpreting changes in the monthly unemployment rate due to concerns over data reliability.
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As a result of the latest error, previously monthly figures overstated the monthly volatility in the first five months of 2025, the ONS’s director general of economic statistics, James Benford, said.
Mr Benford apologised for the release delay and for the errors.
What could it mean?
It could mean retrospective changes to the UK economic growth rate, according to Rob Wood, the chief UK economist at Pantheon Macroeconomics.
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April’s economic growth rate will be revised down, and May’s will be moved up as a result, Mr Wood said.
There will be no impact on the Bank of England’s interest rate decision, he added.
A greater proportion of electric cars were sold last month than at any point this year, industry data shows.
More than a quarter (26.5%) of cars sold in August were electric vehicles (EVs), according to figures from motor lobby group the Society for Motor Manufacturers and Traders (SMMT).
It’s the largest amount of sales since December 2024 and comes as the government introduced financial incentives to help drivers make the move to zero tailpipe emission cars.
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The full suite of grants were not available during the month, however, with a further 35 models eligible for £1,500 off early in September.
Throughout August more models became eligible for price reductions, meaning more consumers could be tempted to purchase an EV in September.
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New EV grants to drive sales came into effect in July
The increased percentage of EV sales came despite an overall 2% drop in buying, compared to a year earlier, in what is typically the quietest month for car purchases.
What are the rules?
The numbers suggest the car industry could be on course to meet the government’s zero-emission vehicle (ZEV) mandate, the thinktank Energy & Climate Intelligence Unit (ECIU) has said.
It stipulates that new petrol and diesel cars may not be sold from 2030.
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Amid pressure from industry, the government altered the mandate in April to allow for hybrid vehicles, which are powered by both fuel and a battery, to be sold until 2035.
Sales of new petrol and diesel vans are also permitted until 2035.
Until then, 28% of cars sold must be electric this year, with the share rising to 33% in 2026, 38% in 2027 and 66% in 2029, the final year before the new combustion engine ban.
Manufacturers face fines for not meeting the targets.
Last year, the objective of making 22% of all car sales purely EVs was surpassed, with EVs comprising 24.3% of the total sold in 2024.
Why?
The increased portion of EV sales can be attributed to increased model choice and discounting, on top of the government reductions, the SMMT said.
Savings from running an electric car are also enticing motorists, the ECIU said. “Demand for used EVs is already surging because they can offer £1,600 a year in savings in owning and running costs.”
“This matters for regular families as the pipeline of second-hand EVs is dependent on new car sales, which hit the used market after around three to four years.
Businesses have cut jobs at the fastest pace in almost four years, according to a closely-watched Bank of England survey which also paints a worrying picture for employment and wage growth ahead.
Its Decision Maker Panel (DMP) data, taken from chief financial officers across 2,000 companies, showed employment levels over the three months to August were 0.5% lower than in the same period a year earlier.
It amounted to the worst decline since autumn 2021 as firms grappled with the implementation of budget measures in the spring that raised their national insurance contributions and minimum wage levels, along with business rates for many.
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The start of April also witnessed the escalation in Donald Trump’s global trade war which further damaged sentiment, especially among exporters to the United States.
The survey showed no improvement in hiring intentions in the tough economy, with companies expecting to reduce employment levels by 0.5% over the coming year.
That was the weakest outlook projection since October 2020.
At the same time, the panel also showed that participants planned to raise their own prices by 3.8% over the next 12 months. That is in line with the current rate of inflation.
The news on wages was no better as the central forecast was for an average rise of 3.6% – down from the 4.6% seen over the past 12 months.
If borne out, it would mean private sector wages rising below the rate of inflation – erasing household and business spending power.
The Bank of England has been relying on data such as the DMP amid a lack of confidence in official employment figures produced by the Office for National Statistics due to low response rates.
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Bank governor Andrew Bailey told a committee of MPs on Wednesday that he was now less sure over the pace of interest rate cuts ahead owing to stubborn inflation in the economy.
The consumer prices index measure is expected to peak at 4% next month – double the Bank’s target rate – from the current level.
Higher interest rates only add to company costs and make them less likely to borrow for investment purposes.
At the same time, employers are fearful that the coming budget, set for late November, may contain no relief.
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Why aren’t we hearing about the budget ‘black hole’?
Sky News revealed on Thursday how the head of the banking sector’s main lobby group had written to the chancellor to warn that any additional levy on bank profits, as suggested by a think-tank last week, would only damage her search for growth.
Rachel Reeves is believed to be facing a black hole in the public finances amounting to £20bn-£40bn.
Tax rises are believed to be inevitable, given her commitment to fiscal rules concerning borrowing by the end of the parliament.
Heightened costs associated with servicing such debts following recent bond sell-offs across Western economies have made more borrowing even less palatable.
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Why did UK debt just get more expensive?
Ms Reeves is expected to raise some form of wealth tax, while other speculation has included a shake-up of council tax.
She has consistently committed not to target working people but the Bank of England data, and official ONS figures, would suggest that businesses have responded to 2024 budget measures by cutting jobs since April, with hospitality and retail among the worst hit.
Commenting on the data, Rob Wood, chief UK economist at Pantheon Macroeconomics, said: “The DMP survey shows stubborn wage and price pressures despite falling employment, continuing to suggest that structural economic changes and supply weakness are keeping inflation high.
“The MPC [monetary policy committee of the Bank of England] will have to be cautious, so we remain comfortable assuming no more rate cuts this year.”
“That said, the increasing signs of labour market weakness suggest dovish risks,” he concluded.
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