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Gauging the economic effects of banking turmoil

Central banks are now in a more difficult position, weighing persistently high inflation on the one hand against strains in the banking sector on the other. For now, they are separating the two by raising interest rates further to tame inflation while also offering generous liquidity support to the banks. But we expect tighter credit conditions to weigh on the economy over time, which will contribute to weakness in demand and inflation and strengthen the case for a turn in the monetary policy cycle. In this Central Bank Watch, we outline the indicators that policymakers will be watching to gauge how banking strains are affecting the real economy.

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