It is a tricky balancing act for central banks in trying to engineer a slowdown in economic activity to lower inflation, by tightening monetary policy, without going too far in hiking rates, and having an even greater contractionary impact on demand.
More recently, central banker’s policy deliberations have been further complicated by the stresses that emerged in the global banking system in March
However, the apparent easing of concerns in relation to the global banking sector, combined with some upside surprises to macro data has seen some renewed firming in market rate expectations over the last fortnight.
Overall, the outlook for official rates has a fair degree of uncertainty attached to it, with the trajectory of ‘core inflation’ being a key determinant, as well as evolving credit conditions in the banking sector.
Thus, this week’s reading of US core-PCE inflation for March, the Fed’s preferred measure of inflation, will warrant attention.
