Richard Woolnough reflects on the rate rises

Richard Woolnough reflects on the rate rises

Investors have no choice but to come to terms with the fact that a cycle of increased interest rates is about to begin as it is unlikely to be avoided. Read on to learn more about what Richard Woolnough, bond fund manager at M&G, has to say about rate rises.

Woolnough believes that this is the case. One of the most significant worries that emerged in the wake of the financial crisis was that there would be no further instances of inflation, however, we are now in a position to unequivocally state that inflation is not extinct, as he puts it. And particularly due to the fact that it has been demonstrated that monetary authorities are capable of causing inflation, the notion that rates need to be maintained anchored to 0 is no longer relevant.

‘Central banks set interest rates and wider monetary policy in order to stimulate demand via low rates, or to increase saving via high rates.’ says Woolnough. ‘Altering the price of money changes the behaviour of individuals and industry. This is an imprecise science with the effect always approximate and the timing usually delayed – empirically around 18 months between the policy change and the lagged outcome to inflation, growth and employment.’

In order to encourage economic development, policymakers want to slash interest rates and hold them at historically low levels at the beginning of the cycle. Inflation will be growing as the economy passes through the recovery phase and into the growth phase. Because of this, central banks are seeking to raise interest rates in order to curb the rising inflation.

The current political and economic situation in Europe means that the European Central Bank (ECB) will place a greater emphasis on the safeguarding of jobs. According to him, the ECB want to get started on the process of rising interest rates, but because the industries that make up the European Union are so diverse, it will be necessary for it to go more slowly than its competitors.

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