What is the scarring effect and how does it affect monetary policy? | Morning Markets

Kevin Kidney, Head of Asset Allocation, looks to the monetary policy meetings taking place this week with the Federal Reserve and the Bank of England and the expectations on interest rate cuts. While no cuts are expected as of yet, there will be a keen eye on communications as to the direction of policy for both central banks with the European Central Bank and Bank of Canada having already begun their cutting cycles. The hesitancy to cut rates could be due to the scarring effect in which past failures to control the rise in inflation pressures through 2021 and 2022 lead to criticism. Contrast to this is the Bank of Japan which raised interest rates overnight to +0.25% with an intent to suppress future inflation pressures to around 1%.