Central bankers must get inflation under control

AThere is currently a remarkable pattern of behavior on the stock markets: at the slightest sign that central banks could continue their policy of rate hikes at a slightly slower pace, stock prices rise. Individual, more cautious statements from central banking circles will suffice for this, or even an event in faraway Australia. There, the central bank raised interest rates only half as much as expected last week. Investors around the world promptly concluded that the momentum of global interest rate hikes was faltering. As a result, share prices rose significantly.

First of all, the response makes sense. If interest rates do not rise as much, equities become slightly more attractive compared to bonds. But that’s too simple a thought. Equity investors need to be clear: their long-term investment success also depends on whether central banks are doing their job right now. In the first place, this means that central banks must now do everything they can to control the rise in global inflation. Only if this succeeds will the brokerage firms be back on firmer economic grounds.

On the other hand, the unleashed inflation poses enormous difficulties for almost all companies. Therefore, investors should not immediately react euphorically to interest rate hikes. But they should keep in mind that such increases will eventually help the economy recover.

The whole process is not without side effects, as evidenced by the turbulence surrounding the major Swiss bank Credit Suisse. While they are largely self-indebted, they are also an expression of the heightened nervousness that currently prevails in the stock markets. A new financial crisis is currently unlikely, but the turmoil will persist given recession concerns and the gas crisis. Investors need patience before things get better.

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