Tatton Teaser: When will Central Banks ease policy?
Posted 18 April 2023
As developed markets move into late cycle, a top of mind question is “when will Central Banks ease policy”. Back in 2019, easing came just at the right time. It was almost pre-emptive to carry the economy towards more growth (hadn’t Covid struck at the turn of the year). This was comparatively straightforward as the underlying inflation picture was benign (chart S&P500 and inflation). However, the current situation is more complicated. Core inflation is running uncomfortably high; and whilst it is projected to come down, this is not necessarily how the broad public perceives the current price situation. To make things harder again, some banks have started to run into trouble. Especially in the US, smaller institutions suffer from deposit outflows. Authorities have been quick to intervene, with deposit guarantees and Central Bank liquidity. Ideally, liquidity supports financial stability, whilst elevated rates help cooling inflation. Indeed, current trading in risk assets suggests market are confident Central Banks will not have to choose between inflation and financial stability. Unfortunately, quite a few episodes of financial tightening cycles suggest a price to pay for reigning into inflation is volatility and quite often economic growth.
Thank you Astrid Schilo for this note.