Inflation pressure could last next three years

Around 41% of Australian investment professionals believe there will be growing inflation pressures over the next one to three years because of demand-focused accommodative monetary policy, but central banks will not be able or inclined to engage in a restrictive policy.

This was according to a report from the CFA Institute ‘COVID-19, One Year Later, Capital Markets Entering Uncharted Waters’.

That compared with 24% of Australian respondents who thought central banks would be forced to raise interest rates due to inflationary pressures.

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While some respondents thought inflation pressures would cause the central bank to raise interest rates (31%), a greater proportion thought the central bank would not switch to a restrictive policy (41%).

Globally, 45% of respondents thought that equities in their respective markets had recovered too quickly from the market slump in March 2020 and were due for a market correction within the next one to three years.

Another 58% of respondents agreed the role of government would broaden as a result of the crisis, and the share of government spending in gross domestic product (GDP) would structurally and materially rise, as will taxes, though in Australia that proportion is much lower at 43%.

Tighter monetary policy, 46% of Australian respondents thought, would hurt growth stocks the most, while 63% thought value stocks would be the most positively affected asset class by a monetary policy reversal.

However, 44% of respondents believed the stimulus measures had created a goldmine for the investor class, widening the wealth gap in society; Australian respondents agreed more strongly with this belief at 4%.

On sustainable investment products 41% of Australian respondents believed the trend was structurally strong and here to stay.

Paul Andrews, CFA Institute managing director, research, advocacy and standards, said with authorities ready to do whatever it takes to prevent a liquidity crisis in the markets, the economic stimulus unleashed to address the crisis may well have consequences of its own.

“While we readily acknowledge the difficulty in crafting one-size-fits-all public policies, our global survey highlights a number of important areas of concern where unintended consequences may already be in sight,” Andrews said.

Lisa Carroll, CFA Societies Australia chief executive, said: “While many governments and central banks have implemented robust and comprehensive plans to meet the crisis head on, concerns are rising as to the eventual unintended consequences of this liquidity infusion, including inflation and a widening wealth gap, with Australian respondents particularly holding these beliefs”.

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