2021 interest rates and inflation outlook

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2021 interest rates and inflation outlook

Edward Al-Hussainy, Senior Interest Rate and Currency 


As an investor, one of the things you can expect over the course of not just this year, but next year as well, is that interest rates will stay low.

With the arrival of the vaccine and given the shock we had last year, I think it's reasonable to say, "Well, look, there's a lot of pent up demand that's going to come through. Will this demand generate inflation? And particularly given low interest rates, does that create a situation where interest rates will rise in an uncontrolled manner and therefore be quite damaging to portfolios?"

I'll note two things. One, I think the odds that inflation comes through remain quite low.

Optically, in March and April, we'll see slightly higher prices on a year-in-year basis. So we'll see a slight bump in inflation. But largely the structural story to inflation is one of stability

The second thing is, the Fed in changing its inflation strategy last year has really tried to change the dynamic between risk assets and inflation. In other words, down the line, when we see inflation rising to 2%, we should not anticipate the Fed tightening. And if the Fed is not tightening and raising interest rates, it's unlikely that those risk assets will underperform the way they have in the past.

I think the key thing for investors this year and next year, and really for the next several years is in an environment of low interest rates, there's significant pressure to move into risky assets, whether that's in equities, in credit, in emerging markets.

So, risk adjusting expected returns becomes a very critical exercise over the next 12 months.

The views expressed are as of December 2020, may change as market or other conditions change and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances.Investmentdecisionsshouldalwaysbemadebased onaninvestor'sspecificfinancialneeds,objectives,goals,time horizon and risk tolerance. Asset classes described may not be appropriate for all investors. Past performance does not guarantee future results,andnoforecastshouldbeconsideredaguaranteeeither.Sinceeconomicandmarketconditionschangefrequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate.

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We expect interest rates to stay low in 2021. But will pent up demand generate inflation? Senior interest rate and currency analyst Ed Al-Hussainy explains his view.

Contact your Columbia Threadneedle Investments representative at 800.426.3750