FT: Markets are optimistic, but high inflation is underestimated

The world’s major central banks are preparing to raise interest rates to the highest level in 15 years.

Central banks, which manage monetary policy in the world’s largest economies, are expected to raise interest rates to their highest levels since the financial crisis this week. The markets are discounting that the rate of adjustment will slow down and even reverse in the medium term.

However, according to the British newspaper Financial Times, despite the positive mood in the bond market, the dangers related to inflation still exist.

THE HIGHEST LEVEL OF THE LAST 15 YEARS

The US Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE) will announce their interest rate decisions this week. Investors expect the Fed to halt monetary tightening by raising interest rates by 25 basis points.

However, the Fed’s interest rate level is expected to be the highest since September 2007, when the global financial crisis began. The BoE and ECB are also expected to raise rates by 50 basis points to the highest levels since the fall of 2008 when Lehman Brothers filed for bankruptcy.

INFLATION RISK CONTINUES

Although there is an optimistic environment in the markets due to the slowdown in financial tightening, according to the Financial Times, there are signs that price pressures are permanent in the face of these rapid and coordinated rate hikes. Furthermore, the gap between investor expectations and economic data is widening.

Inflation is 6.5 percent in the US and 9.2 percent in the euro area. These rates are well above the 2 percent target set by central banks. Core inflation, closely watched by central bankers, also remains strong.

Consumers and businesses expect inflation to remain above the central bank’s targets over the medium term despite recent declines.

EXPECTATIONS ARE HIGH

In the Financial Times analysis, it was stated that there are concerns that higher inflation expectations will lead to further increases in wages, which will fuel inflation again.

“Inflation expectations may be a self-fulfilling prophecy,” said Nathan Sheets, chief economist at US bank Citigroup. Because the higher expectations trigger the expected inflationary conditions. Central banks were also concerned about the upward acceleration of inflation expectations.

While the data announced last week reinforced expectations that the US economy could have a ‘soft landing’ and supported stock markets, the monetary policy decisions announced this week are expected to reduce uncertainties about the next period. .