Central banks will prioritise inflation over growth
The era of free money has come to an end
By Azad Zangana, Senior European Economist and Strategist at Schroders
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.
Central banks have probably already done enough to lower inflation in the near-term, but there has been a regime shift in the trade-off between growth and inflation.
The global economy is likely to continue to face cyclical inflation and ongoing labour shortages, pushing labour costs higher. The global economy must also learn to cope with rising structural inflation associated with political fragmentation and the response to the new world order. Deglobalisation has put an end to the globalisation dividend and so there is less room for domestic inflation pressures as there was in the past.
Commendable as it may be, decarbonisation, and the transition to a more sustainable economy is likely to be a very inflationary trend.
Structurally higher inflation means that monetary policy must remain tighter and more restrictive than before the pandemic if central banks are to meet their obligations to maintain price stability. The regime shift will result in higher interest rates for longer, and a reduction in global liquidity.
Higher interest rates will have significant consequences for investors and financial markets. From the implications for asset valuations, to 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. The era of free money has come to an end.
Further reading : Regime shift: central banks will prioritise inflation over growth, by Azad Zangana, Senior European Economist and Strategist at Schroders
