The war in Ukraine is disrupting supply lines of key global products, sending soaring inflation even higher and forcing central banks to revisit their interest rate policies.To get more news about AUSFOREX澳汇, you can visit wikifx.com official website.
Inflation has been effectively non-existent for decades thanks to the rise of technologies like computing and automation, the transfer of global manufacturing to low-cost jurisdictions and global shocks like the financial crisis and COVID-19 causing economic contraction.
In fact, central banks and governments have been more worried about deflation than inflation, which is why interest rates have been at historic lows for such a long time, and why economic stimulus packages had been issued by governments even before shock of the pandemic.
However, central banks’ concerns around inflation increased as the world emerged from the pandemic and pent-up consumer demand pushed up prices for goods. In addition, the environment of low rates, economic stimulus and supply chain issues added to inflationary pressures, with countries experiencing multi-decade highs including;Which means central banks have a problem. They need to raise interest rates to curb demand by making debt more expensive and encourage saving over spending.
Certainly, bond markets are anticipating rates to rise significantly to deal with the problem, making bigger bets on bond prices than they have in thirty years. Bonds and interest rates are negatively correlated, so as bonds are sold off and prices decline, interest rates on said bonds rise.
In economics, stagflation is the ultimate bogeyman. Under normal conditions it shouldn’t exist, as the levers underpinning an economy — growth, employment and prices — should counterbalance each other out depending on whether the economy is speeding up or slowing down. Interest rate policy is how central banks maintain that balance.
But stagflation happens when the levers are pulling in the wrong direction.
Usually inflation happens when the economy is growing fast, there’s lots of work and strong consumer demand causes prices to rise. When growth stalls or falls and jobs decline, prices should also decline as consumers are less inclined to buy.
Stagflation is when output is stagnant or falling but prices remain high. For central banks it’s a nightmare scenario as the main lever they can pull to reduce inflation – higher interest rates – ends up compounding the pain of a slowing economy. Higher rates stop companies investing, creating unemployment and the extra debt payments of householders, on top of existing high prices, further reduces disposable income.
The current US Federal Reserve board is keen to avoid inflation getting out of control, with Fed chair Jerome Powell telling markets in late March it would hike rates by 50 bps (half a percent) if needed. Bond markets are ahead of where the Federal Reserve is on interest rates, with the recent sell-off suggesting interest rates 2.3% higher than the Fed’s target.8
What that means, in short, is central banks globally are expected to turn their attention away from easy monetary conditions and instead act aggressively to stamp out inflation.
The war in Ukraine is disrupting supply lines of key global products, sending soaring inflation even higher and forcing central banks to revisit their interest rate policies.To get more news about AUSFOREX澳汇, you can visit wikifx.com official website.
Inflation has been effectively non-existent for decades thanks to the rise of technologies like computing and automation, the transfer of global manufacturing to low-cost jurisdictions and global shocks like the financial crisis and COVID-19 causing economic contraction.
In fact, central banks and governments have been more worried about deflation than inflation, which is why interest rates have been at historic lows for such a long time, and why economic stimulus packages had been issued by governments even before shock of the pandemic.
However, central banks’ concerns around inflation increased as the world emerged from the pandemic and pent-up consumer demand pushed up prices for goods. In addition, the environment of low rates, economic stimulus and supply chain issues added to inflationary pressures, with countries experiencing multi-decade highs including;Which means central banks have a problem. They need to raise interest rates to curb demand by making debt more expensive and encourage saving over spending.
Certainly, bond markets are anticipating rates to rise significantly to deal with the problem, making bigger bets on bond prices than they have in thirty years. Bonds and interest rates are negatively correlated, so as bonds are sold off and prices decline, interest rates on said bonds rise.
In economics, stagflation is the ultimate bogeyman. Under normal conditions it shouldn’t exist, as the levers underpinning an economy — growth, employment and prices — should counterbalance each other out depending on whether the economy is speeding up or slowing down. Interest rate policy is how central banks maintain that balance.
But stagflation happens when the levers are pulling in the wrong direction.
Usually inflation happens when the economy is growing fast, there’s lots of work and strong consumer demand causes prices to rise. When growth stalls or falls and jobs decline, prices should also decline as consumers are less inclined to buy.
Stagflation is when output is stagnant or falling but prices remain high. For central banks it’s a nightmare scenario as the main lever they can pull to reduce inflation – higher interest rates – ends up compounding the pain of a slowing economy. Higher rates stop companies investing, creating unemployment and the extra debt payments of householders, on top of existing high prices, further reduces disposable income.
The current US Federal Reserve board is keen to avoid inflation getting out of control, with Fed chair Jerome Powell telling markets in late March it would hike rates by 50 bps (half a percent) if needed. Bond markets are ahead of where the Federal Reserve is on interest rates, with the recent sell-off suggesting interest rates 2.3% higher than the Fed’s target.8
What that means, in short, is central banks globally are expected to turn their attention away from easy monetary conditions and instead act aggressively to stamp out inflation.