Central banks' focus on inflation raises risk of recession - PIMCO

NEW YORK Reuters - Central banks' focus on fighting persistently high inflation could lead to a recession over the next two years and raise the risk of financial accidents, the U.S. investment firm PIMCO said on Wednesday.

In the last year, rising prices have dominated the global financial markets, pushing central banks to increase interest rates to contain demand.

High volatility in markets has been caused by uncertainty around the pace of tighter monetary policies and its consequences for global economies.

Geopolitical instability caused by the war in Ukraine has also contributed to wild price swings across bonds and stocks, while exacerbating inflation by pushing the costs of commodities such as oil and gas.

The PIMCO report said on Wednesday that there was an increased risk of a recession over the next two years.

There are a number of risks including higher inflation and the possibility of more geopolitical unrest because of the possibility of economic contraction.

It also shows central banks' focus on fighting inflation first, a move that raises the risk of financial accidents, as well as the tightening of financial conditions already seen, said PIMCO.

The scramble by central banks to catch up with inflation has been devastating for bond investors this year. The U.S. government bond yields, which move inversely to prices, have gone up sharply in what has been the worst start to the year for bond markets.

The monetary and fiscal responses to a recession could be less muted and slower than in previous cycles because of inflationary concerns, according to PIMCO.

It is true that the next recession may well be more prolonged and recovery more sluggish, and that for many reasons our view is that the next recession is unlikely to be as deep as the Great Recession of 2008 or the COVID sudden stop of 2020.

Some products such as the U.S. Treasury Inflation-Protected Securities TIPS offer some protection against rising uncertainty, according to PIMCO, one of the world's largest fixed income investors.

It said it will favor high-quality corporate debt due to higher companies' defaults in a recession that has been marked by lower monetary and fiscal support.

Central banks focused on inflation and governments focused on national security and environmental security considerations will likely be less inclined to support companies outside sectors that are deemed important to the targeted pursuit of resilience, it said.