Core inflation has been persistent across both the United States and the Eurozone, slightly reversing previous indications of a smoother path and a faster deceleration. With few signs that underlying inflation will decelerate rapidly in the near term and significant weaknesses emerging in parts of the banking sector, market expectations of policy and short-term rates have seen unprecedented volatility. While policy efforts can stabilise financial stability concerns regarding the banking sector, higher lending rates and tighter lending conditions will persist. Central banks appear to be caught between a rock and a hard place and now have a policy trilemma: setting the stance of monetary policy vis-à-vis inflation and growth, while protecting financial stability at the same time.

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