In the December issue, we assess the likelihood of stock market volatility as central banks shift position on monetary policy.
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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.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Please remember investment involves risk. The value of investments and the income from them can fall as well as rise and investors may not receive back the original amount invested. Past performance is not a guide to future performance.