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Economics: Central bankers – seeing stars

Another star in the sky

We have raised our policy rate forecasts again. But financial stress has started to emerge before signs of the real economy cracking. This has stimulated interest in a concept called r**, or ‘r-double-star’ – the interest rate consistent with financial stability.  

Shifting policy trade-offs

The emergence of financial stress is altering the perceived trade-offs for central banks. Will financial stress simply reinforce central banks’ tightening? Or could it encourage undue hesitancy, distracting policymakers from their battle against inflation? 

Risks to our central case

This latter possibility presents a risk to our base case for the global economy. It could increase medium-term inflation risks, see the dollar strengthen further, and ultimately increase the severity of the recessions that central banks are trying to engineer

Economics: Central bankers – seeing stars
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