The financial system is being tested by higher inflation and rising interest rates at a time when inflation in many jurisdictions remains uncomfortably above central banks’ targets. The emergence of stress in financial markets is complicating the task of central banks.
In the aftermath of the global financial crisis, amid extremely low interest rates, compressed volatility, and ample liquidity, market participants increased their exposures to liquidity, duration, and credit risk, often employing financial leverage to boost returns.
The fundamental question confronting market participants and policymakers is whether the recent events are a harbinger of more systemic stress that will test the resilience of the global financial system or simply an isolated manifestation of challenges from tighter monetary and financial conditions after more than a decade of ample liquidity.
