Central banks need to take decisive action to tame rampant inflation, rein in underlying inflation expectations and repair their damaged credibility, according to industry think tank The Geneva Association.
The message follows the annual meeting of the Geneva Association Economic Forum (GAEF) which took place in Paris, hosted by Scor. The meeting convened more than 20 members of the GAEF Network, comprised of chief economists and chief strategy officers from the world’s leading insurers and reinsurers.
The inflation bear could be tamed by embarking on rate hikes coupled with quantitative tightening, the forum found.
Other key messages from the meeting:
- • Monetary policies are not the only ‘game in town’: more liberal trade policies, more rigorous competition policies and more flexible labour market policies could make a significant contribution to bringing inflation down.
- • The socio-political consequences of the current surge in inflation will be felt for much longer than the inflation episode itself. We should prepare for growing social tensions, challenges to the green transition and geopolitical divisions.
- • Given the instability and distortions that come with protracted high inflation, it could have a negative impact on the growth of insurance markets and insurance penetration.
- • Insurers have a big tool kit at their disposal to respond to inflation, for example through inflation-linked investments, reserve adjustments, repricing of risk, product innovation, productivity increases and loss prevention.
GAEF Chairman and Munich Re chief economist Michael Menhart commented: “The global economy has become much more fragile again, as the Russian war in the Ukraine, very high inflation and still unresolved supply chain problems all impact the economic outlook.”
“Uncertainties are elevated and downside risks dominate – an outright recession in a major economy is a distinct possibility. Inflation remains the key concern. Going forward, I expect inflation to be lower than in 2022, but still at very elevated levels and higher than central bank targets.”
Session chair and Swiss Re chief economist Jérôme Haegeli added: “Inflationary recessions are coming in a number of advanced economies, meaning GDP growth will contract while inflation will still be high, even if receding.”
“It is cyclical stagflation on steroids, though very far from structural, 1970s-style stagflation. There is also a sunny side: exiting the negative interest rate environment and higher interest rates are a big positive for our industry. Finally, risk-free rates are not return free anymore.”
Session chair and Allianz chief economist Ludovic Subran added: “Central banks now have to put the inflation genie back in the bottle by tightening monetary policy fast and purposefully. This will not be without some havoc. In addition, we cannot solve the inflation problem with monetary policy alone: fiscal, trade, sectoral, competition and labour policies also need to be put to work.”