Although inflation is slowing globally, many countries still face significant pressure on core prices, which is pushing core inflation above central bank targets.
With a difficult scenario on the table, central banks are forced to tighten monetary policy in order to cause a slowdown in demand, but this is a very delicate dilemma that regulators must manage.
They must strike the right balance to cool down economic activity without causing a recession or financial meltdown. The dilemma of central banks is made even more difficult by the fact that although the economy remains resilient, the potential for a slowdown next year is increasing, ”explains Hans-Joerg Neumer, Global Head of Global Capital Markets and Thematic Research at Allianz Global Investor ( AlianzGI).
The expert also stresses that as financial tensions persist, the risks of monetary policy errors also increase.
Global economic growth was balanced, in practice, by better macroeconomic data from China and the Eurozone, against weaker data from the US, UK and Japan.
“So what are monetary policymakers likely to do in this environment? The Fed has paved the way for breaking the cycle of rate hikes in June. In turn, we expect the European Central Bank (ECB) and Bank of England (BoE) to raise key interest rates. by an additional 50 basis points each by the fall,” the expert predicts.
Hans-Joerg Naumer explains that the three central banks seem willing to stay on course “higher for longer”, keeping interest rates stable until 2024, even if the environment becomes somewhat recessive. Drastic interest rate cuts appear premature, although futures markets expect them for the US starting in the second half of 2023.
In general, global financial markets are likely to shift their attention away from the short-term economic recovery and focus more on deflationary risks in the medium term.
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