In the medium term, the green transition may further fuel inflationary risks, according to ECB board member Isabel Schnabel in an interview with the Financial Times last weekend. Rising energy prices, she said, may require the ECB to do more to hold back increases. She urged portfolios to increase their investments into real assets.
Schnabel said there were two scenarios in which the ECB might have to adjust policy. The first is if high energy prices spill over to other sectors in the economy and start to affect pricing behaviour there. “However, for the time being we do not see any second-round effects,” she said.
In the second scenario, energy prices, heavily influenced by carbon taxes and the green transition, would push headline inflation above the 2 percent target.
Philippe Gijsels (photo), chief strategist of BNP Paribas Fortis, said that he agreed with Schnabel’s statements.
“Germany has agreed for a very long time to things that are actually very un-German: high inflation, support for the EU, and transfers to the southern European countries to fight the crisis. The great transition is useful but brings with it conflicting interests. We are, as it were, evolving from the Stone Age to modernity. However, at a fast pace, you are going to create disruptions and cause prices to rise.”
Gijsels has been convinced for some time that inflation will remain structurally higher. Inflation, he said, also comes in waves of thirty to forty years. “You see a lot of inflationary elements, such as disruptions in supply chains and monetary and fiscal policy, but also deglobalisation and conflicts in the world. We are living in the mirror image of the early 1980s, when the world opened up.”
Environmental narrative
The environmental story and the green transition reinforce this. Gijsels mentions that this evolution can already be observed on the stock markets. According to him, real assets remain a good hedge as long as real interest rates remain low. “Real assets are the anchor point in our allocation and were so before the Covid-19 crisis. The problem is that they have become a lot more expensive and vulnerable to a rise in interest rates. Inflation, however, will ensure that real interest rates remain negative.”
Investors, according to Gijsels, were “in a hammock, but now they have to use a safety net if things go the wrong way. The pressure on the Fed is greater now than it was in 2018. They have no choice but to be hawkish. Volatility will undeniably increase.”