FRANKFURT - Having raised interest rates at the fastest pace on record to tame inflation, the world's top central banks are openly contemplating an early end to their rate hikes, not least because of financial turmoil in recent weeks.
The U.S. Federal Reserve, the European Central Bank and the Bank of England all raised rates as expected in the last week, but each of them signalled caution about their next move, leaving investors unsure where borrowing costs are going.
The Fed indicated it was on the verge of pausing, the ECB said it would no longer provide guidance and instead decide meeting-by-meeting, while the BoE said it expected the surge in inflation to cool faster than previously predicted.
Central banks have already done much of the legwork in raising rates, and inflation is well off its highs, even if there are lingering questions about just how stubborn price growth will prove to be on the way down.
But until the recent bout of financial sector volatility, the expectation had been that both the Fed and the ECB still had some way to go.
That all changed in a matter of a weeks.
Although bank shares have rebounded since the collapse of Silicon Valley Bank and the UBS-led rescue of Credit Suisse, the stress is far from over.
Central banks are concerned that the market ructions could translate into higher funding costs for lenders, which in turn would slow borrowing, thwart credit growth, weigh on economic growth and ultimately dampen inflation.
"The turmoil might lead to some additional tightening of financing conditions not triggered by monetary policy, in which case maybe we have to do less," Dutch central bank chief Klaas Knot told Reuters.
Fed Chair Jerome Powell had a similar warning on Wednesday, noting that more expensive funding had broader ramifications for growth, borrowing and investments.
"Events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes," Powell said.
The Bank of England said on Thursday policymakers would "monitor closely any effect on the credit conditions faced by households and businesses" and what that means for the economy.
The interconnected nature of the financial system means that what happens in the United States - particularly Fed policy - has ramifications for everyone.
It was the Fed's rapid rate hikes that created much of the stress on Silicon Valley Bank's balance sheet, souring sentiment towards regional U.S. banks and providing the impetus for the sell-off in Credit Suisse.
"This is the kind of thing economics students discuss in late-night bars, rather than being relevant for markets, but the speed with which the U.S. regional banking crisis spread to a major Swiss bank, and the speed with which global monetary policy expectations adjusted, highlights how joined-up the global financial cycle is," Societe Generale currency strategist Kit Juckes said.
Central banks have also been quick. The Fed raised interest rates by 475 basis points in nine successive meetings, the ECB by 350 basis points over six meetings and the Bank of England by 415 basis points in 11 sessions.
This is lightning-fast by central banking standards and ECB's Knot said policymakers needed to have a deeper look at how it is affecting lenders.
"Interest rate risk in the banking book deserves a more prominent treatment and a more prominent discussion among banking supervisors," Knot argued.
Another issue is inflation. It is now well off its multi-decade highs, and while disinflation is likely to be bumpy, with continued pressure from wages on both sides of the Atlantic, the slope is clearly downwards.
Combined, these factors suggest that big central banks are nearly done, and that upcoming rate moves may be their last.
For the Fed, markets see a 50% probability of just one more hike in May, having priced out an entire increase since the start of the turmoil. At the ECB, investors see only 50 basis points of moves left, less than half of what they predicted just two weeks ago, while just one more 25-basis-point hike by the BoE is priced in for May or June.
"The U.S. economy may see tighter lending standards than what could be explained by macroeconomic fundamentals. If so, our view is that it could indeed substitute for further rate hikes," Michael Gapen at Bank of America said.
(Editing by Mark John and Catherine Evans)