He added: “Banks everywhere will be shoring up their capital and money that they thought was free to be lent may not be.”
Banks are now expected to be more reluctant to lend money over the coming year and interest rates will no longer rise as sharply, according to the CEBR.
Mr Williams said the Bank of England is very unlikely to raise rates by more than 25 percentage points this week and may not even do that. In the US, the CEBR expects interest rates not to be raised again.
Mr Williams said: “We will see that the fight against inflation will have been called off before inflation has been fully beaten. You can’t fight a war on two fronts at once and dealing with the banking crisis is much more important than squeezing out the remnants of inflation.”
So, if banks lend less then this means smaller increases in the money supply. Which, quite naturally, moderates inflation without any need to raise formal interest rates.
Not that we’d actually want to have a banking crisis in order to reduce inflation but that will be the effect all the same.