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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Markets shaken after bank collapse
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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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Biden on Silicon Valley Bank collapse
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.
Business
‘Significant’ step in establishing national restorative justice programme for Post Office victims
A “significant” step has been taken in establishing a national restorative justice programme for victims of the Post Office’s Horizon IT scandal.
Children of affected postmasters, as well as those directly hit by the faulty accounting software, will be part of the partially Fujitsu-funded programme, as the UK’s Restorative Justice Council acknowledged more than financial compensation was needed.
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Data from the Fujitsu-made Horizon computer program led to the wrongful prosecution of more than 700 postmasters for theft and false accounting, while many more racked up large debts, lost homes, livelihoods and reputations as they borrowed heavily to plug the incorrectly generated shortfalls in their branches.
As part of the inquiry into the scandal, its chair, Sir Wyn Williams, recommended the government, the Post Office and Fujitsu engage in a formal restorative justice plan to provide “full and fair redress
Restorative justice aims to repair harm by bringing together victims and those responsible.
Long-sought family involvement
On Thursday, the Restorative Justice Council (RJC), which runs the project, said it would expand engagement to children and families of victims.
The move marked “a significant advancement in the establishment of a national restorative justice programme for those impacted by the Post Office Horizon IT scandal”, the body said.
Relatives have long sought acknowledgement and support for the harm they suffered.
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‘We’ve carried the trauma for 20 years’
Some have told Sky News how their eating disorder escalated due to the prosecution of a parent, and they carried trauma for decades.
Calls for a family fund were made to redress the “chances that were taken from us growing up”.
What’s involved?
Online listening sessions for children of those affected and people previously unable to attend are planned in an effort to ensure all voices contribute to the restorative justice programme.
Also involved in the initiative is equipping the government (via the Department for Business and Trade), Post Office and Fujitsu “with the necessary skills and knowledge to engage in restorative dialogue with integrity”, the RJC said.
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Post Office scandal children seek justice
Group-based sessions with organisations involved in the scandal and a confidential safe space service for affected people to share their experiences and explore healing without the pressure of a formal process will be created.
Freelance restorative listeners are being recruited by the service for this purpose.
The formation of the scheme acknowledges the limitations of financial redress, with the RJC saying “true restoration requires truth, acknowledgement, accountability and meaningful action beyond financial compensation”.
The funding question
The restorative listening and wellbeing service is being funded by Fujitsu.
It comes amid questions as to the contribution of the Japanese multinational to redress.
Fujitsu has said it is “morally obligated” to contribute to the costs, but the extent would be determined by the outcome of the Horizon scandal public inquiry. Further inquiry reports are to be released in the coming months.
The Post Office is government-owned and so it’s taxpayers who fund victim payouts.
What next?
The RJC initiatives are pilot schemes for now.
Feedback from them is intended to shape the design of a full, long-term, national restorative justice programme, due to launch in April.
An updated report on restorative justice for Post Office victims will be published in January.
“The next phase is about translating their voices into real, restorative action – ensuring that healing, accountability and cultural change progress hand in hand,” said RJC chief executive Jim Simon.
So far, 145 individuals have been involved, with an extra 200 postmasters expected to be engaged between November and March.
“Engagement is good and continues to grow,” Mr Simon said.
Tech giants Apple and Amazon have defied industry predictions with better-than-expected financial results.
Apple’s success is largely thanks to record-breaking iPhone sales, while Amazon’s is down to cloud computing arm Amazon Web Services (AWS), in spite of last week’s outage which knocked out thousands of websites.
AWS revenue accelerated 20.2% to $33bn (almost £25bn), which CEO Andy Jassy said was a pace it hadn’t seen since 2022. AWS accounts for 60% of Amazon’s total operating income.
Cloud growth has been a key focus for the company in the face of ever-growing pressure from rivals Google and Microsoft, which also reported revenue leaps this week.
While welcoming its latest results, Amazon has also issued a cautious sales outlook. File pic: Reuters
iPhone on the charge
With Donald Trump introducing punishing tariffs on India and China – the main manufacturing hubs for the iPhone – Apple’s record revenue has been even more welcome for boss Tim Cook.
The tariffs cost Apple $1.1bn (£824m) during the past quarter and are expected to cost another $1.4bn (just over £1bn) during the final three months of the year, but the new iPhone 17 range is a hit.
Consumers have been won over by a price point that didn’t stray above last year’s model, particularly in the US and Europe, leading to sales totalling $49bn (£36.1bn) during the July-September period – 6% up on last year.
Global market analyst IDC says almost 59 million iPhones were sold worldwide in the July-September quarter, putting Apple second behind Samsung at 61.4 million of their Android-powered phones.
Buoyed by the iPhone results, Apple earned $27.5bn (£21.4bn), or $1.85 per share (£1.44), nearly doubling its profit from a year ago. Revenue climbed 8% from a year ago to $102.5bn (£80bn).
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Tim Cook was famously once referred to by Donald Trump as ‘Tim Apple’. Pic: Reuters
Wall Street analysts had been cautious about both companies, and their tech rivals, because of uncertainty caused by tariffs and whether investment in AI has been overplayed.
While welcoming its latest results, Amazon has issued a cautious sales outlook for the fiscal fourth quarter, citing continued Trump tariffs as a possible bump in the revenue road.
Companies, including Amazon, are introducing AI into nearly every facet of their operations in hopes of reducing costs and boosting productivity. There have been tens of thousands of job losses at US tech firms this year.
On Wednesday, Federal Reserve Chair Jerome Powell said he did not believe the AI boom was a speculative bubble like the dot-com era, when many companies were “ideas rather than businesses”.
Today’s AI leaders “actually have earnings,” he said.
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