What role are central banks likely to play?
Mark: One of the things we talk a lot about in our team is whether we see alignment between how central banks and markets are positioned structurally and the cycle, as we often see the most significant moves in asset prices when they disconnect. We saw this lack of alignment in play early last year and while most central banks have now reorientated their policies, it is interesting that at the first sign of inflation peaking, the US Federal Reserve and other central banks appeared ready to take their foot off the accelerator. In parallel, investors are still looking to replicate the old model of “buy on the last rate hike”. In our daily Wellington meetings and investor discussions, John and colleagues have been highlighting the risks for asset prices associated with this behavioural anchoring, so we are very alert to those dynamics.
John: Ultimately, we think central banks — many of which have accumulated multiple alternative objectives — will shy away from the demand destruction needed to bring inflation below target. Moreover, we believe that the new regime may introduce a greater risk of financial instability, and a central bank will always prioritise financial stability over inflation targets.