Central banks battle inflation and political headwinds

Significance

With greater-than-usual uncertainty about the course of inflation and economic growth, decisions taken now by central banks will have a crucial impact on longer-term growth prospects and living standards. Central banks remain firm on tackling inflation, but face increasing political headwinds as their stance roils markets and depresses growth.

Impacts

• Growing internal divisions within central banks over the future trajectory for interest rates will damage their credibility.
• Financial markets have underestimated how long central banks are intending to kept rates high, dampening any potential stock market rally.
• Central banks are counting on inflation easing steadily but this could be derailed by tight job markets and the war in Ukraine.
• Government efforts to limit the economic impact of rate rises will add to public debt, worsen political tensions and affect the bond market.
• The strong US dollar will stir resentment in Europe and weaken emerging market nations, especially ones with large dollar-denominated debts.