Inflation is potentially the biggest investment story of the year, with stocks, bonds and alternative assets all being driven by rising prices, which have hit a 30-year high .
The war in Ukraine has exacerbated problems brought about by clogged-up supply chains and slower economic movements from Covid, driving inflation over the past few months.
Central banks have taken decisive action to take control of the situation before price increases get out of hand, but each have taken different approaches to tackling the crisis.
Here, Trustnet asks industry experts which banks have taken the most effective direction in their monetary policy.
Mabrouk Chetouane, head of global market strategy at Natixis IM Solutions, said that he liked the Federal Reserve’s (Fed) aggressive handling of inflation, which surprised investors with a 75 basis point increase to interest rates this month.
The market had anticipated a far lower 25 basis point rise, but the bank was more forceful in bringing down its 8.6% inflation.
Anchoring the rapid inflation rate is the Fed’s top priority at present, even if it greatly increases the risk of a recession, according to Chetouane.
Central banks are treading a fine line by raising rates so frequently – it can help cool inflationary pressure for the time being, but too aggressive action can dampen the performance of businesses.
Although the method taken by the Fed can negatively impact growth, Chetouane said that “it is a necessary evil as it serves as a demonstration of its pragmatism, which is key to preserve its credibility in pursuing its mandate of price stability”.
This was echoed by Richard Hodges, manager of the Nomura Global Dynamic Bond fund, who said: “The Fed is solely focused on reducing inflation (for now) and is orchestrating a recession; they aim to rebalance the differential between (post-pandemic, pent-up) demand and (Russia/Ukraine, Covid-hampered) supply by reducing the former.”
Rates could reach 3.4% by the end of the year and then 3.75% next year, according to the Fed’s forecasts, but Hodges expects them to slow well before then.
He expects their monetary policy tightening to reduce the rapidity of inflation much sooner, and as such, the Fed can begin taking its foot off that gas before the end of the year.
Chetouane added: “Jerome Powell may continue to surprise investors in the short-run but this approach is not intended to last for long.”
Hodges also anticipates a lot of attractive deals in the credit and sovereign bond markets when US rate hikes stop and asset prices become much cheaper.
“The opportunity is coming, and we are ready to pounce on it. We just need to remain patient for now”, he said.
Gero Jung, chief economist at Mirabaud Asset Management said that the Fed’s process of monetary tightening for as long as necessary to bring down inflation, but the European Central Bank (ECB) will react less aggressively.
Interest rates in the Eurozone have so far remained unchanged, but the ECB’s president, Christine Lagarde, announced an expected hike in July as inflation reached 8.1% in May and growth forecasts were lowered.
A second rate hike is likely in September, but Jung predicts that inflation in the region will begin to flatten by the end of the year, stating that “the very hawkish ECB pricing is overdone.”
He said that it is also worth noting the Swiss National Bank’s (SNB) recent rate hike, which puts it slightly ahead of its sister organisation.
Jung added: “Among the major central banks, the last dovish central bank standing is the Bank of Japan - but for how long?”
Sébastien Galy, senior macro strategist at Nordea Asset Management pointed out that the UK economy is experiencing a shock similar to what we’ve seen in the eurozone, but with the added impact of Brexit.
UK funds have experienced more outflows since leaving the European Union as the region becomes more isolated, but the pound has remained relatively stable compared to the Euro, according to Galy.
Despite this, inflation in the UK is higher than any other G7 nation, reaching 9.1% in May, and the Bank of England (BoE) is likely to pile on additional interest rate hikes.
However, more hikes are unlikely to put a dent in low UK sentiment or imported inflation, according to Galy.He added that rising oil prices, a huge driver of UK inflation, are also out of the BoE’s hands.
Galy said: “The ECB has some time on its hands, but the BoE must run the gauntlet, and from history, this is one battle it has learned to win.”