Recent bond market movements are signaling the risk that inflation surprises will force rapid monetary tightening next year. While not our base case, a rapid tightening in global financial conditions and capital outflow from emerging markets are a key risk for MNCs to watch in 2022. Firms should find ways to proactively mitigate FX depreciation and rising cost of capital by utilizing hedging strategies and designing flexible contract terms where possible.


The Federal Reserve made a widely expected announcement that it would begin unwinding asset purchases. However, it struck a surprisingly dovish tone on its interest rate policy. Without specifying a timeline for rate hikes, Fed Chair Jerome Powell implied the first increase would not come until at least late 2022 or early 2023. Similarly, the Bank of England decided last Thursday to hold its benchmark rate at 0.1% despite widespread expectations of an imminent rate increase. The European Central Bank continues to signal no rate hike plans, preferring to wait and see how price pressures play out in the coming months.

fed rate hikes, inflation, bond

Our View

Central banks around the world are grappling with the questions of whether high global inflation is truly “transitory,” how long it will last, and whether interest rate increases are the appropriate policy response. Most developed-market (DM) central banks have concluded that price pressures will fade on their own in the coming months. However, investors increasingly doubt that take. Implied market expectations now signal a 93% probability of at least one rate increase by the Fed, and a 36% chance of three or more hikes, by the end of next year. Multiple rate hikes would occur under a scenario where inflation continues to rise above expectations, forcing the Fed and other DM central banks to respond quickly to curb price increases. Under that scenario, emerging markets may experience capital outflows, currency pressure, and rising bond yields as investors seek the safety of DM assets.

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