Inflation and interest rates – what next?
Higher interest rates and inflation are top of mind looking ahead to 2023. In fact, high interest rates were part of why SVB suffered losses that led to its failure.
Last year inflation spiked to 40-year highs and to slow economic activity and alleviate inflationary pressures, central banks increased interest rates at a pace not seen since the 1980s. This combination of inflation and rising interest rates resulted in weak returns on both fixed income (bonds) and equities. This is unusual, but likely to pass as inflation pressures fade.
As the Bank of Canada increased rates, inflation started to come down slightly. But there is a time lag. It takes between 12 to 18 months for rising interest rates to trickle thorough the economy. The upside is that inflation is likely to continue falling over the next year even if the Bank of Canada stops raising interest rates.
Markets are focused on two key unknowns. First, when will inflation return to a more normal level? And second, when will central banks start lowering interest rate? While only time will tell, here’s a reminder for municipal investors:
- Municipalities invest over long time horizons. Overall, markets have always grown over the long-term, despite short term gyrations and unusual years.
- Your investment policy is your guide post. The policy lays out objectives, risks tolerance and timeframes for different needs and projects. Adapt or review your portfolio through this lens.
- Municipalities have a high level of Council and taxpayer accountability. Explaining complex financial markets is more challenging, especially to newly elected Councils and in difficult economic times. It’s useful to remind councils of how the municipal investment policy is geared to meet local needs and ride out market ups and downs.
Municipalities can reach out for help that is tailored to their unique needs. ONE Investment Advisory Services offers expertise in global markets and municipal finance to provide hands-on support to municipalities including investment strategy and implementation.