High demands are being placed on central banks. They are expected to ensure price stability and support the economy during recessions. But central banks in industrial countries have gone above and beyond that remit recently. By keeping interest rates low, they ensured that neither states nor real estate owners were overwhelmed by their debt, provided the financial markets with prompt support when setbacks occurred and granted the banks so much liquidity that they were no longer at risk of bankruptcy. In Europe, the European Central Bank has saved the euro on top of its main tasks, while the Swiss National Bank has alleviated currency risks facing economic players with its currency policy.

Central banks have proven themselves to be real all-rounders. But they’ve been able to tackle other challenges because they haven’t been overstretched by their main responsibility of ensuring price stability. Regardless of what the central banks did, inflation rates have remained low and stable. 

If prices rise more rapidly

They will face far greater challenges when inflation rates move out of their target bandwidths. Tackling inflation is making it more difficult for central banks to meet the other demands placed on them. Higher interest rates mean indebted states as well as financial and real estate markets are facing a strong headwind. It’s why the current high level of inflation in many countries is a cause for concern, and the key question is whether or not these effects are temporary.

Making inflation forecasts for 2022 is now about as serious an art as predicting who will win the football World Cup in 2022. Just as Switzerland are highly unlikely to win the tournament, there are fewer and fewer indications that inflation rates will return to normal next year. We will at least get an indication of how central banks will act where they have to accept lower economic growth to tackle inflation. 

Central banks face difficult decisions

All this means the central banks will face difficult decisions. They are currently still in support mode in the industrialized world. In the eurozone and the USA, the central banks are continuing to buy bonds on a huge scale. We expect these schemes to end soon – as already cautiously announced – but also that interest-rate decisions will become an increasingly important issue. While the Swiss National Bank is unlikely to be one of the frontrunners, it may also make adjustments in the wake of measures taken by other central banks. Tactically, we are continuing to align the portfolios entrusted to us towards a sustained period of high inflation. Besides adopting an underweighted position in global bonds, we are now focusing on equities, which perform better during phases of higher inflation.