The end of a long and unexpected era of low rates is here. In recent weeks, dozens of central banks are ending extraordinarily accommodative monetary policies. They started after the emergence of the 2008 financial crisis and intensified even more during the recent pandemic period.
During this time, a well-established perception unknown in generations had been inoculated into the economies and markets: globalization, technological innovation and demographic trends were a powerful vaccine against inflationary risks. Moreover, perhaps too powerful, some central banks were beginning to suspect. This is the only way to explain why they even began to think about how to alter this kind of strong natural anti-inflationary immune system that had supposedly been created, so that monetary policy would recover a certain margin of maneuver that would facilitate stable and lasting growth in the long term.
In most advanced economies, rates were at unprecedented levels a few months ago. In some cases, such as the eurozone or Japan, in a negative territory that determined unimaginable volumes of debt in the bond markets in which the issuer of these, and singularly the sovereign States, but not only, “charged interest” to their holders . A dystopia created in order to deal with the shocks caused by the financial crisis, and later by the pandemic, which dragged on over time.
The scenario has not changed due to the action of the central banks. They have been, first the bottlenecks caused by the pandemic, and then the start of an also unexpected war within Europe, putting energy and food supplies at risk, and skyrocketing their prices, the determinants of a radical change. It could be thought that temporarily. But neither the doubts about the duration and final nature of the armed conflict, nor the collapse of the principles of a global economy, nor the second-round effects that will derive from the inflationary disturbance, invite us to be optimistic in the short term.
The answer: rate hikes, led and initiated by the Federal Reserve and the Bank of England, will be intense and sustained in the coming months. Nearly all the relevant central banks, and of course the ECB, will soon join this move that the markets have already priced in, causing the biggest known losses in the bond market in many decades and a serious correction in the stock markets. Not surprising. At the moment, however, with a hopeful outcome: there are only expectations of a slowdown, in a context of still notable economic growth forecasts.
Daniel Manzano Y Xavier Pino they are a partner and an analyst at Afi, respectively.
He knows in depth all the sides of the coin.
Exclusive content for subscribers
read without limits