Central banks will prioritise inflation over growth
By
👤Schroders
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Inflationary pressures mean monetary policy must be tighter and more restrictive than it has been in the recent past. Higher for longer interest rates will be an important feature of a new regime in policy and market behaviour.
The global economy is likely to continue facing cyclical inflation and ongoing labor shortages, which will push up labor costs, according to an article. There has been a regime shift in the trade-off between growth and inflation, and there is a structural inflation associated with political fragmentation and the response to the new world order. The deglobalization has put an end to the globalisation dividend, resulting in less room for domestic inflation pressures. Additionally, the transition to a more sustainable economy and decarbonisation is likely to be a very inflationary trend.
The article suggests that central banks have done enough to lower inflation in the near-term, but structurally higher inflation means that monetary policy must remain tighter and more restrictive than before the pandemic if central banks are to maintain price stability. This regime shift will result in higher interest rates for longer and a reduction in global liquidity.
The rise in interest rates will have significant consequences for investors and financial markets, including the implications for asset valuations and the additional volatility that will be introduced. Investors will have to adapt to a world where the “Fed put” cannot be relied on to bail-out risk assets, and the era of free money has come to an end.
By
👤Schroders
