A six-member jury of financial experts, under the auspices of the Swiss financial portal finews.com and Natixis Investment Managers has chosen the Swiss Financial Word of the Year for 2022.
«Hawkish» is the 2022 word of the year for the Swiss financial markets, selected from over 260. The candidate words were submitted to a six-member jury consisting of finance professor Sita Mazumder, author Michael Theurillat, entrepreneur Adriano B. Lucatelli, Timo H. Paul, Managing Director of Natixis Investment Managers (Switzerland), and finews.com editors Claude Baumann and Thomas Pentsy.
The Rationale
During the Corona pandemic, many central banks took actions to ease monetary policy to support economic recovery, including interest rate cuts and asset purchases.
This year, the monetary policy cycle again ran largely in sync, but in the opposite direction. Central banks pulled the reins of monetary policy, raising interest rates, with some starting to reduce the size of their balance sheets.
The goal of these measures is clear. Central bankers want to bring inflation under control, with the about-face on the interest rates indicative of the tug-of-war between inflation and a slowing economy.
More Hawks Than Doves
Hawks and doves describe the monetary and interest rate policy leanings of central bankers. Hawks believe that controlling inflation is the top priority, and tend to raise interest rates to reduce the demand for money. For doves, economic growth takes precedence over inflation concerns, and prefer lower interest rates to achieve economic growth and jobs by making money more easily available.
Inflation in many countries reached its highest level in several decades this year, pressured initially by food and energy prices, but has spread more widely. The hawks prevailed in the monetary policy committees. Central bankers continue to implement an interest rate policy with an aggressiveness not seen in decades.
The Lubricant of Monetary Policy
«The hawks' tight course is reflected in economic life in a wide variety of manifestations and knock-on effects,» says finews.com founder Claude Baumann. Key interest rates ultimately move just about everything in the economic world, from the course of the economy and corporate investment to financial markets and currencies, real estate markets, and consumer and savings behavior. «The term 'hawkish' encapsulates all the things that can happen when interest rates rise.»
For Sita Mazumder, professor of economics and computer science at the Lucerne University of Applied Sciences and Arts (HSLU), the central banks' less accommodative interest rate stance is an expression of «the shortages created by the bottlenecks in global supply chains and the disruptions in commodity markets caused by the Ukraine war.»
Even after the energy crisis, inflation could remain problematic, with «second-round effects risking a wage-price spiral,» she points out. In response to the sharp rise in inflation, wage dynamics need to be closely monitored, she adds.
Economic and Social Consequences
Central banks need to fight inflation hard to prevent the income gap from widening. «An entire generation of workers has never faced such high price increases,» comments writer and former banker Michael Theurillat. High inflation not only has economic but also political and social consequences, especially since «the cost burdens hit low-income workers especially hard, also in Switzerland.»
He agrees with Mazumder the aggressive interest rate policy is also a knock-on effect of the inflation-driving bottlenecks in the global economy. «Tightness increases aggressiveness,» Theurillat notes.
Bond Market Crash
Bonds are typically safe-haven securities with small price swings that add stability to a portfolio during volatile periods. But for bondholders, the hawkish course of central banks meant heavy losses. «The bond bubble has burst,» says entrepreneur Adriano Lucatelli of the policy turnaround. «Money has value again,» he comments on the demise of the low-interest era.
A prime example of this year's bond market crash is the 100-year government bond issued by Austria in 2017. Such long-dated bonds are comparatively rare in Europe. In retrospect, the supposedly safe investment turned out to be high-risk security. While investors were still chasing yield with government bonds in the low-interest rate environment, the Austrian securities are now trading well below par.
Light At the end of the Tunnel
«In retrospect, 2022 was indeed the most difficult year in a long time for most investors,» explains Timo H. Paul of Natixis Investment Managers.
«As asset managers, we are no strangers to such dislocations, and there are appropriate solutions for almost all situations. In bonds, there are more interesting opportunities now than there have been for many years,» says Paul.
A Question of Perspective
finews.ch editor Thomas Pentsy also points to the distortions in the financial markets that have been unleashed by the change in trend in interest rates. For years, U.S. real estate prices, for example, knew only one direction: up. «Now, however, the real estate market is reflecting downward dynamics not seen since the financial crisis.»
In the wake of the sharp rise in interest rates, recession worries were now increasingly in the spotlight. «Economic crises can temporarily turn even the biggest hawks into doves,» says Pentsy, referring to a possible change in direction by the Federal Reserve next year.
The Ninth Word
The election of the Swiss Financial Word of the Year took place for the ninth time in 2022. The terms chosen in previous years were «negative interest rates,» «zero interest rate policy,» «franc shock,» «Bitcoin,» «punitive tariffs,» «Libra,» «debt pandemic» and «greenwashing.»
This year's winners are Peter Meier, Ramon Schindler and Imelda Baumgartner. They each receive a magnum bottle of the premium wine Magnum N°2 Maremma Toscana DOC 2019 – donated by Vinothek Brancaia in Zurich.
