Central banks alone cannot eliminate risks to macroeconomic stability and provide an environment conducive to economic growth. Fiscal policy must also step in and play an active role in bringing the deficit back to a sustainable level. Also, a credible agreement between fiscal and monetary authorities on a common course of action to reduce vulnerability would be equally important, the BRD report to investors said.

Starting from the second half of the year, domestic inflation will decrease in intensity with higher dynamics, reaching single-digit values, the document also states. Below are the most important statements from the BRD report:

The global context leads to difficult choices

Central banks around the world are facing unprecedented challenges as they try to ease the transition from a period of low inflation to a period of high inflation in a fragile and complex financial landscape.

Initially underestimating the strength and persistence of inflationary pressures, central banks later reacted with greater intensity in what was the most synchronized and intensive shift to tight monetary policy since World War II.

The unorthodox measures taken in monetary policy in the past have led to unorthodox policy dilemmas in the present because they have created a series of imbalances that limit their room for maneuver.

The legacy of a long period of low interest rates and abundant liquidity means that central banks operate in an environment characterized by high asset prices and high reliance on liquidity.

This complicates monetary adjustment, as there is a clear trade-off between inflation management and financial stability, with problematic implications for resource allocation.

From this point of view, the effect of shrinking central banks’ balance sheets can be much greater than the stimulus provided by quantitative easing.

Although the banking sector is in much better shape than it was in 2008, there is little cause for complacency

In the medium term, the challenge for central banks is also compounded by the militarization and deglobalization of the world, characterized by greater commercial/financial fragmentation, aging populations, and structural changes driven by the digitalization/environmental transition.

The global financial system is already under significant pressure from the sudden change in monetary policy. The failures of SVB and Signature Bank in the US, along with the acquisition of rival UBS Credit Suisse in Switzerland, shook markets this spring. It was a reminder that while the banking sector is in much better shape than it was in 2008, largely thanks to regulatory reforms, there is no reason for complacency.

Moreover, the sector of non-banking financial intermediation is quite vulnerable, as it is subject to the stress of funding sources (for example, the collapse of Archegos Capital Management on September 21 or the turmoil in the British government bond market in October). .

Stakeholders must act to maintain confidence through better macroprudential regulation,

Hence, policymakers should act to preserve confidence through better macroprudential regulation, paying close attention to monitoring dividend payouts and risk accumulation in non-bank capital markets.

Concerns about debt affordability have recently resurfaced due to the sharp rise in global public debt, which has reached an all-time high since the start of the COVID-19 pandemic, while tighter financial conditions have led to a greater debt service burden.

Fiscal considerations are already affecting the policies of some central banks – the European Central Bank is concerned about the impact of its monetary actions on “fragmentation” (the yield on securities issued by countries with worse financial conditions compared to countries with better financial conditions).

At the time of writing, major central banks are raising interest rates more slowly. At its latest monetary policy meeting (May 4), the European Central Bank slowed the pace of interest rate hikes to 25 basis points, raising the deposit rate to 3.25%, but left the door open to further rate hikes.

The macroeconomic context seems to recommend keeping interest rates high for a longer period of time

In another move to boost borrowing costs, the ECB said it plans to end reinvestment under the APP from July 2023. The Fed announced a 25 basis point rate hike, lifting the federal funds rate to a target range of 5%-5.25%, the highest level. level since August 2007. But the Fed also said it may end a streak of 10 rate hikes.

The macroeconomic context seems to recommend keeping interest rates high for a longer period of time to bring inflation back to sustainable levels.

In particular, economic growth remains stronger than expected and the labor market continues to show remarkable resilience, all against a background of persistent economic imbalances.

Thus, the easing of monetary policy may start later than the markets expect and will not be as fast as they expected.

We believe it is premature to discuss a rate cut, at least until core inflation enters a clear downward trajectory towards the NDB’s inflation target, after fiscal consolidation progresses and labor market tensions ease.