Inflation, COVID-19 and debt are the main worries of central banks – UBS survey

LONDON, July 7 (Reuters) – Inflation has become a top concern for central bank reserve managers, alongside the failure to end the COVID-19 crisis and soaring levels of debt, showed the results of a UBS survey released on Wednesday.

Fears about inflation and uncontrolled rises in long-term yields, a risk that was not at all pointed out by participants in last year’s Annual Survey of Reserve Managers, were mentioned by 57 % of people surveyed this year as a main risk to the world economy.

The inability to end the pandemic was cited as a concern by 79% of those polled, with 71% reporting the level of government debt.

Reflecting the angst over the severity of COVID-19, half of survey participants believe the virus will not be over until after 2022.

Reserve managers from nearly 30 global central banks responded to the survey, conducted in April and June.

“Inflation is back at the top of central bankers’ concerns,” Massimiliano Castelli, UBS’s head of strategy and advice for global sovereign markets, told Reuters.

“The majority say they expect a hike, but not somehow go to very high inflation levels. So there seems to be some sort of opinion within the central banking community. that the rising inflation we are currently experiencing is transitory. “

In terms of risks specifically related to the investment of foreign exchange reserves, the main concern, cited by 86% of respondents, remains the decline and negative returns in bonds.

More than two-thirds of participants expect the US Federal Reserve to raise interest rates in 2023, while 30% expect the Fed to do so in 2022.

In contrast, participants expect a later hike cycle for the European Central Bank, with 33% expecting the first interest rate hike in 2023, 41% in 2024 and only 26% after 2024.

When asked how far major central banks could go to support markets and the economy if needed, 58% of those polled thought the Fed could turn to yield curve control.

The trend towards greater diversification of reserves across asset classes continued, according to the survey. Equities are an eligible asset class for more than 40% of central banks and emerging market debt for 54% of respondents, while there has been a move towards more inflation-protecting assets.

Almost 40% of respondents expect central bank wholesale digital currencies to launch within the next three years.

Reporting by Tom Arnold in London Editing by Matthew Lewis

Our Standards: Thomson Reuters Trust Principles.