We’ve seen inflation remain stubbornly highly at around 8%.
Central Banks have a mandate to keep, certainly the ECB, inflation at 2%.
When inflation remains stubbornly high they look to act and increasing interest rates is one of the ways they (Central Banks) will look to curb inflation they are looking to increase interest rates probably at every periodic meeting for the foreseeable future.
The inflationary pressure we’re seeing at the moment is a lack of consumer goods coming from China, it’s from manufacturing disruption from Covid lockdowns, it’s from sanctions on Russia, which is limiting oil and gas supply and it’s from lack of foods and grains from Ukraine because of the invasion.
Now, increasing interest rates isn’t going to increase the supply of consumer goods or foods or fuels, while it will obviously, curb other parts of inflation.
Another consideration for central banks is the level of debt.
The level of debt globally between governments, companies and individuals in 2021 was $300 trillion.
So an increase in interest rates is going to have an impact.
A lot of that debt will be fixed rate but taking a local example of individuals looking for mortgages the cost of mortgages will increase for new mortgages which means individuals will be able to borrow less and standard variable rates will go up and that will obviously put more financial pressure on people.
Other considerations then would also be that in the last maybe 10 or 15 years or so, we’ve seen low interest rates and bond-buying has had a big impact on stock markets and property markets, we’ve seen a big increase there (in stock markets and property markets).
Stopping bond-buying (by Central Banks) and increasing interest rates will put pressure on opening markets.
I think what to do is, for those with mortgages if you’re in the position to review or to change, I think it might be time to look into that while interest rates are low, it might save some money when other things are getting more expensive.
I think for investors and for pension investors who have funds based on the stock markets or direct stocks, I think it’s to look at your time horizon.
If you’re looking at a ten-year time horizon, long-term growth in the stock markets is positive, so I would be mindful of that and keep an eye on your time frame as opposed to short stock market volatility, which is unfortunately just part of investing.
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