Report
Cyril Regnat

Run, run, inflation…

As empha sis ed by the International Monetary Fund in its World Economic Outlook , rarely has such great uncertainty surrounded inflation prospects at global level, and that therefore even greater vigilance was needed on the part of the central banks. Judging from the wave of interest rate hikes observed in South America and Eastern Europe, it would seem that some central banks did not wait for the IMF's message before acting , the latest to come off the fence being Chile's central bank, which raised its O/N rate by 125bp to 2.75% on Wednesday. Banco Central Chile clearly won’t be the last central bank to tighten its monetary policy if not this year then next when you consider that inflation is expected to average 4.9% next year in emerging countries according to the latest IMF forecast. Closer to home, the markets will be particularly attentive to the Bank of England ’s next decisions . While the Federal Reserve will take the lead by announcing the details of its tapering on 3 November , it is most unlikely to broach the issue of a hike in Fed Funds rate. Not so the Bank of England . A major difference with the United States is that inflation expectations have risen significantly, as illustrated by the £ 5Y5Y inflation forward , which is trading at nearly 3.90%, at its highest since late 2009. Though the 90bp rate hike for the £ curve does seem excessive at first sight , this does not detract from the likelihood the Bank of England will raise its key policy rates, even though this tightening would reduce growth p otential a little more in 2022. With inflation subsiding next year in developed countries (from 2.8% to 2.3% on average in 2022 according to the IMF) , the Bank of England could be a case apart, with rate hikes that may remind some of the adjustments made by the ECB in 2008 or 2011 (bad decisions, bad timing ). Even so , can a different scenario in the US or even in the Eurozone be totally ruled out ? No, especially since inflation peaks are potentially ahead of us in many countries, with the risk of second-round effects linked to the rise in energy/food prices and/ or the persistence of supply disruptions in many sectors. Inflation is trotting along, trotting along … Let’s hope it does not break into a lengthy gallop .
Provider
Natixis
Natixis

Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.

 

Analysts
Cyril Regnat

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