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Central Banks at a Crossroad ?

It can be said that the current period is when every central bank has to decide on its road to take in terms of rate cuts, hold or hike. This first began when the Bank of Japan started rate hikes but last week it gained momentum as the ECB started rate cuts after five years. 

This week FOMC meet with new inflation data on the same day giving more guidance on the summer trend. In addition, the Bank of Japan also meets this week to decide on the start of quantitative tightening as the inflation momentum is strong. 

This would create some level of differences, especially in bond and currency markets. It might keep uncertainty in financial stability and inflation in the second half of the year. 

The biggest issue with central banks' policies being divergent from each other is that in the medium and long run, it becomes difficult for investors and corporations to estimate trajectory. This leads to global corporations gaining market share as most of the local corporations do not have the bandwidth to manage such volatility.

The underlying theme remains common that is interest rates would remain higher for longer even if rates were cut. That would make highly leveraged individuals and corporations vulnerable to a financial shock, especially on a global scale.


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