• Major central banks, including the RBA, have been working hard through 2022 to get on top of ‘todays problem’   high and rising inflation. Global monetary policy has tightened significantly, with more tightening expected into early 2023. The ongoing exception to this trend is expected to be the BoJ and PBoC.
  • But, during H1 2023 we expect some of the major central banks, including both the US Fed and RBA, to end their tightening cycles. Indeed, before the end of 2023 we expect to see the start of a monetary policy easing cycle in both the US and Australia, as central banks pivot towards ‘tomorrows problem’ – a significant slowdown in economic growth. Our base case envisages a global recession in 2023 – the first central bank induced global recession for a number of decades.
  • This pivot in monetary policy and the global economic slowdown is expected to have a significant impact on financial markets, with the potential for a strong rally in bond markets and an eventual shift in the strong USD trend. There is also the risk of something ‘breaking’, with recent developments in crypto markets and platforms a good example, while market volatility is likely to remain elevated. 

‘Today’s’ problem – Inflation and policy rates1

In June this year I visited the US and was lucky enough to have a meeting with a senior member of the New York Federal Reserve. Remembering that back in June the Fed had barely started to raise interest rates, the Fed Funds rate was 1% at the time of our meeting.

But the message from the NY Fed was that the US economy was very strong and that there was ‘excess demand everywhere’. The key message was that ‘everyone knows that inflation is the biggest issue and that the Fed knows what it needs to do.’ 

I was left in no doubt that the Fed was just at the start of a sharp monetary policy tightening cycle and, of course, that is what has transpired. I was also told that high inflation was a ‘global problem’ that this will require a tightening in ‘global monetary policy’.

Our conversation then turned to the economic outlook and the downturn that the coming sharp tightening of monetary policy would likely create – how would central banks deal with that?

The reply I received to this question was very instructive, as I was told that any upcoming recession was ‘tomorrow’s problem’ and for now the Fed must deal with ‘today’s problem’  that is inflation.

So for the world’s major central banks, the second half of 2022 has been dominated by addressing ‘today’s problem’ high inflation. This has seen significant monetary policy tightening across the US, Canada, New Zealand, UK, Europe and, of course, here in Australia.

Read the full report.

CBA’s Global Economic and Markets Research (GEMR) team publishes a wide range of economic and financial research each week covering the latest data, trends, policy developments and topical issues in Australia and other major economies. To access these publications please visit the GEMR website.

Our Economic Expert

Stephen Halmarick is Chief Economist and Head of Global Economic & Markets Research at Commonwealth Bank of Australia. He was appointed to the Chief Economist role in April 2020 – having been the Head of the Global Economic & Markets Research team since January 2018. Stephen is responsible for the team of economists and strategists that cover Australian Economics, International Economics, Rates, Fixed Income, Foreign Exchange, Credit and Commodities research. Stephen is also a key spokesperson to clients and media on macroeconomic themes and a broad range of financial market issues.