The global economy has seen a significant recovery in 2021, which has brought inflationary pressures. Central banks are under pressure to respond and many have started to tighten monetary policy. Interest rates are already rising in South Africa, Russia, New Zealand and Mexico, but all eyes are now on the Federal Reserve, ECB and Bank of England.
The Federal Reserve started tapering its asset purchases in November, even if a rise in interest rates is currently unlikely before the second half of 2022. The Bank of England has resisted rate rises so far, but looks likely to push for a marginal rise in the cost of borrowing in its December meeting.
A rising rate environment can typically be an unstable time for stock markets. Providing any rate rises are small and flagged well in advance, markets are likely to remain calm. However, any sudden rise would almost certainly spook markets and create volatility.
The risk is that inflation accelerates into 2022, leaving central banks struggling to defend their view that rising prices are ‘transitory’. The Federal Reserve may be forced to abandon its new ‘average inflation targeting policy’. For the time being, however, this is an outside risk.
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