Top bankers warn Ukraine war will fan flames of inflation

Some of the most senior figures in finance have warned the world is heading into an era of higher inflation and geopolitical uncertainty, saying the Ukraine conflict has exacerbated the deep-seated trend towards rising consumer prices.

Heavy-hitters from the financial sector on Tuesday said Russia’s invasion of Ukraine had further complicated the dilemma facing central banks, by fanning the flames of inflation while also making the economic environment more uncertain.

Chief executives of the Commonwealth Bank, Macquarie Group and Morgan Stanley all highlighted the backdrop of rising inflation at the AFR Business Summit in Sydney on Tuesday. However, they remain upbeat in their outlook for underlying economic activity.

CBA chief executive Matt Comyn said that after speaking with clients in recent weeks, he was struck by the concern about constrained access to labour, and how firms were being affected by rising costs. He said inflationary pressure would “undoubtedly” accelerate due to higher oil prices, which have surged since Russia’s invasion.

While acknowledging the human tragedy of the war, he said it would not have a major direct impact on economic activity. It signified, however, the end of decades of relative geopolitical stability.

“The broader implication though is we’ve gone through a period of remarkable stability – notwithstanding the pandemic. I think this… potentially ends for the foreseeable future, decades of global stability, free trade, globalisation and the benefits that come from that.”

Morgan Stanley’s Australian-born chief executive, James Gorman, said the US Federal Reserve faced a “real dilemma” in trying to tame inflation – which is at 40 year highs of 7.5 per cent in the US – at such an uncertain time.

“Unambiguously, inflation is on the rise and it is not transient. With the war, the price of oil, the oil shock, commodities, you’re going to have more inflation. So the problem just got bigger, not smaller,” Mr Gorman said.

“They have to raise rates, but you don’t want to tip the economy into recession. You tip it into recession, you end up with stagflation and it’s really bad.”