Will the Bank of England hold its rates as US Federal Reserve faces a nasty dilemma?

Which matters more: control of inflation or financial stability? The world’s central bankers now find themselves facing that vexing question, particularly those in the US where there are very real concerns about smaller banks after the collapse of Silicon Valley Bank (SVB) and a “flight to quality” among depositors.

The US Federal Reserve and the Bank of England’s Monetary Policy Committee both meet next week. We’ll look at the US first. The Federal Reserve is further ahead in the cycle than the UK. After a string of chunky rises, it settled on a 0.25 percentage point increase at the last meeting amid hopes that rates were close to their peak.

Last week, February’s US inflation rate came in at 6 per cent, a reduction from the previous 6.4 per cent, which was broadly in line with Wall Street expectations. However, core inflation, which strips out volatile components such as energy and food, barely changed with the annual increase showing at 5.5 per cent compared to 5.6 per cent in January.

The stickiness of core inflation has led to speculation that the Fed might return to a more aggressive stance by imposing another 0.5 percentage point rise.

But the developing banking crisis has thrown things for a loop. Could the Fed now stand to ease the pressure on its struggling banks? Some think it will.

The European Central Bank stuck to its guns by raising its key rate by 0.5 per cent to 3 per cent, while at the same time seeking to reassure the markets that it would act if necessary to maintain stability.

America has bigger problems with its banks. Perhaps it splits the difference with a 0.25 point rise? There is no consensus among forecasters. The central banker’s lot is not a happy one.

In the UK, the pathway is a little easier to predict. Britain didn’t take its foot off the regulatory gas as Trump did at Wall Street’s behest. Its banks are much better capitalised than they were. Lloyds boss Charlie Nunn said he didn’t see any signs of a “flight to quality” among depositors last week, which provided some reassurance.

Even though UK inflation is much higher than in the US – the annual rate of increase in the Consumer Prices Index came in at 10.1 last time – the view in Britain is that it has peaked and will fall sharply from here on out.

UK interest rates are expected to hit a high of 4.5 per cent. They currently stand at 4 per cent. Recent comments from monetary policy-makers have led to speculation that the next rise may be of a quarter point, with a further subsequent small increase getting us to 4.5.

Financial stability will certainly be a part of the MPC’s discussions and officials are monitoring developments very closely. But it should play less of a role in decision-making. The focus will be on how much more is needed to keep inflation, and particularly core inflation, on its downward path without wrecking the economy. An update is due this week from Office for National Statistics. That will be the figure to watch.

Swati Dhingra, one of the MPC’s vocal pair of doves, recently argued that rates should be held. She is concerned about the UK economy and inflation falling below the MPC’s 2 per cent target further down the line if the MPC is too aggressive.

I would expect the similarly dovish Silvana Tenreyro to vote for a hold as well. I think the most likely outcome in the UK is a 0.25 point rise on a 7-2 vote. That said, a good chunk of the City thinks rates will be held and I wouldn’t rule that out, particularly in the light of recent comments by governor Andrew Bailey that could also be interpreted as dovish.

However, Bailey is rather good at using a lot of words to say not very much; how they are interpreted can vary.