With core inflation still high in many advanced economies, central banks may need to keep monetary policy tighter for longer than is currently priced in markets. In emerging market economies, progress on lowering inflation appears to be more advanced, though there are discrepancies across regions. Yet, optimism about a “soft landing” of the global economy, whereby disinflation continues apace and a recession is avoided, has eased financial conditions since the April 2023 Global Financial Stability Report—stock markets have rallied, credit spreads have remained tight, and emerging market currencies have appreciated. Upside surprises to the inflation outlook would challenge the soft-landing narrative, resulting in a potentially sharp repricing of assets. While acute stress in the global banking system has subsided, a weak tail of banks remains in some countries. Cracks in other sectors may also become apparent and could turn into worrisome fault lines that would again test the resilience of the global financial system in the event of an abrupt tightening of financial conditions. Most notably, the global credit cycle has started to turn as borrowers’ debt repayment capacity diminishes and credit growth slows. Risks to global growth are therefore skewed to the downside, similar to the assessment in April.
