Central banks may need to step in again to safeguard financial stability, Capital Economics says

Central banks may need to step in again in order to avoid panic selling and money market distress, a top economics consultancy said.

Citing the recent "breakdown" in the UK Gilt market as an example, Capital Economics senior markets economist, Jonas Goltermann, explained that central banks were facing an "increasingly difficult" trade-off between combating inflation, supporting economic growth, and safeguarding financial stability.

"With core bond and currency markets facing very high volatility and worsening liquidity conditions, we think the risk that central banks have to step in again to prevent a destabilising cycle of panic selling and money market distress has risen, even if that would clash with plans to tighten monetary policy further."