Investors Need to be Aware of Risks of Higher Inflation: ECB

According to European Central Bank (ECB) policymaker Klaas Knot, investors need to be aware of the risk of rising inflation. That is to avoid shock adjustments, even as price rises still appear to be temporary.

The Dutch central bank governor said that only low inflation and low interest can sustain the current risk appetite in the markets. He said he still expects the rise in inflation to be largely temporary.

But they have to take other scenarios with structurally higher inflation and higher interest rates into account. Because if they don’t, it could lead to shock price falls in the future.

A spike in energy prices pushed inflation in the eurozone to its highest level since 2008. This same indicator was 3.4% in September. But as the effect of higher energy prices wanes, inflation is still expected to slow next year.

Knot said the effect of energy prices on inflation is temporary by nature. They need to keep rising to keep pushing up inflation. But inflation is also pushed higher by global supply restraints, which might be less temporary, he said. They could be caused by a readjustment in international trade, as supply chains spread less across the globe, he added.

An Imminent Rate Hike: BOE

Elsewhere, one of the most hawkish members of the Bank of England’s Monetary Policy Committee, Michael Saunders remarked that investors were right to bring forward bets on rate hikes. Earlier in the day, BOE Governor Andrew Bailey warned of a potentially very damaging period of inflation unless policymakers take action. 

Dan Hanson, the senior economist, said the comments make it clear that upcoming rate-setting meetings starting November are very much live. 

In an interview, Bailey also said he doesn’t anticipate a further increase in unemployment after the government ended its furlough program last month. Economists expect the central bank to consider jobs data after the end of the program. That’s before deciding whether to lift rates from the current record low of 0.1%.

A mix of higher energy prices, supply chain disruptions, and rising wages in some industries has weakened the central bank’s original view that much of the rise in prices will be transitory. Last month, the BOE said it expects inflation to exceed 4% in the last quarter. That is more than double its target.

Investors were betting on faster rate hikes in recent weeks. By the end of 2021, markets are almost fully pricing in the first move. They expect to see the benchmark rate hitting 0.75% in 2022.