Economics: Central banks shift into neutral
The pace of monetary tightening looks set to step up again.
Central banks are displaying increased urgency about the need to tighten policy and bring inflation back down. Many seem to want to get rates up to at least a ‘neutral’ level as quickly as possible and to start the process of shrinking their balance sheets.
Policy rates look unlikely to reach a ‘restrictive’ level.
We’ve raised our policy rate forecasts for the Fed, ECB and BoE to reflect this urgency. But we remain unconvinced that rates will peak as high as markets currently discount. We still ultimately expect slowing growth and falling inflation to curtail the hiking cycle.
Monetary divergence between East and West looks unstable.
The PBoC looks resolute in refraining from ‘flood-like’ stimulus. Pressure on the yuan is probably reinforcing this bias. This monetary divergence with the West looks unstable. Pushing it further could trigger a sudden tightening of financial conditions.