MAP Macro Outlook: Patience Is Still a Virtue

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The global economy reflects an uneasy balance between a myriad of risks and pockets of resilience, with the result that global economic momentum is being sustained even while inflation is slowly and fitfully decelerating.

In this environment, central banks are preaching and practicing patience. While some policymakers increasingly feel ‘on top of inflation,’ no policy committee is yet ready to begin to ease restrictive policy settings. And, once the easing begins, the profile of cuts is likely to be slower and shallower than in previous cycles.

Although the risks around inflation have become more balanced, the band of uncertainty is uncomfortably high. The patient stance of central banks reflects a shift in strategy towards more conventional ‘risk management’ from ‘robust control,’ which characterised post-pandemic efforts to rein in rampant inflation.

Policy will appear more backward looking and the risks of an inflationary undershoot will build over time. In our view (one not overtly shared yet by many central banks), the risks of policy proving too tight are mitigated by secular inflationary forces that the re-ordering of the global economy will increasingly drive.

The European Central Bank and the Bank of England each face challenges from wage growth and stubborn services inflation (the BoE faces additional pressures from the upcoming Budget on the demand side and Brexit on the supply side). Meanwhile, the Federal Reserve faces a different ‘problem’ – resilient growth. While decisions will depend on whether upcoming data confirm disinflationary trends, the ECB and the Fed are most likely to begin cutting rates in June. The start of BoE easing could be delayed into the summer in the wake of fiscal stimulus and high wage growth.

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