On Wednesday, 1 February 2023, the UK Campus had the pleasure of having Dr Alexis Stenfors from the University of Portsmouth with us to talk about a topic that is very close to our hearts and something that affects our everyday lives, “Financial Market Turbulence and the Return of Inflation”.
Dr Alexis Stenfors is currently a Reader in Economics and Finance at the University of Portsmouth and Deputy Director of the Centre for Innovative and Sustainable Finance (CISF). Before returning to academia in 2009, Dr Stenfors spent 15 years as a foreign exchange and interest rate derivatives trader at HSBC, Citi, Crédit Agricole and Merrill Lynch. He has also held academic positions at SOAS University of London, University of Leeds, Washington University in St. Louis, Peking University HSBC Business School, Meiji University and University of California Berkeley. Dr Stenfors’ recent research includes manipulation and anti-competitive behaviour in money and foreign exchange markets, liquidity issues on electronic trading platforms and unethical trading practices among human and algorithmic traders – published in journals such as Journal of International Financial Markets, Institutions & Money, Economics Letters and Journal of Economic Issues. He is the author of ‘Barometer of Fear: An Insider’s Account of Rogue Trading and the Greatest Banking Scandal in History’ (Bloomsbury) and co-editor of ‘Unconventional Monetary Policy and Financial Stability: The Case of Japan’ (Routledge). Dr Stenfors also advises on financial market risk, compliance, crime and surveillance issues and has served as an academic and industry expert in a number of criminal and litigation cases involving financial markets in both Europe and North America. With such an impressive resume, it was our great pleasure to have him give a talk to our staff and students.
After decades of low and stable price increases, inflation returned in 2022. When inflation rises, the value of money declines, and prices increase. In response, central banks may raise interest rates to cool down the economy and keep inflation in check. This can lead to increased volatility in financial markets as investors adjust their portfolios in response to the changing economic conditions. Financial market turbulence can also be caused by other factors such as geopolitical tensions, natural disasters, or technological disruptions. The sources causing the recent turbulence are many, including Brexit (for the UK), the Covid-19 pandemic, supply-chain issues, the energy crisis, the Russian invasion of Ukraine or prolonged accommodative monetary policy.
The impact has, however, been unequally distributed. Low-income households have been the most affected by soaring food and energy prices. At the same time, governments have urged employers and trade unions to exercise restraint to prevent a wage-price spiral. Central banks, on the other hand, and in line with their inflation-targeting mandates, have raised interest rates at a record-breaking pace. Overall, it appears as if the overwhelmingly independent and inflation-targeting central banks have evolved into the new guardians of a global cost-of-living crisis – in conjunction with the authority already held by financial markets in providing instant feedback on policy decisions or announcements. The relationship between governments and central banks is an interesting, albeit complex, one. In his seminar, Dr Stenfors also revisited the events around Black Wednesday in 1992 and the subsequent historic shift in power from governments to central banks and financial markets.
Black Wednesday, also known as 16 September 1992, was a day of financial turmoil in the United Kingdom. It was triggered by the British government's decision to withdraw the pound from the European Exchange Rate Mechanism (ERM) after failing to keep the pound within its agreed exchange rate band. This led to a significant devaluation of the pound and caused widespread panic in financial markets. The event resulted in billions of pounds of losses for investors and the UK government. It also forced the resignation of the Chancellor of the Exchequer, Norman Lamont.
Dr Stenfors further explained how the events of Black Friday marked a turning point in UK economic policy and the relationship between governments and central banks. The UK government's decision to withdraw from the ERM highlighted the limitations of government intervention in financial markets. This event led to a growing recognition of the importance of central bank independence and the need for monetary policy to be conducted by technocrats, rather than politicians. Following Black Wednesday, the UK government granted the Bank of England operational independence in setting interest rates, which became a model for other countries. Central banks were given greater responsibility for maintaining price stability, and governments agreed to limit their influence over monetary policy.
Dr Stenfors suggested that this shift towards central bank independence reflected a growing consensus that monetary policy should be conducted in a depoliticized manner to avoid short-term political pressures and ensure long-term stability. As a result, central banks have become increasingly powerful in setting monetary policy, with governments playing a more limited role in this area. In doing so, it played a crucial role of inflation in policy making and the violent swings in money markets, bonds, and foreign exchange rates as seen in 2022.Top of Form
Dr Stenfors also explained the role of inflation and how it affects policy making. Inflation plays a significant role in policy making as it is a key indicator of economic health and stability. Central banks and governments use inflation as a guide to determine their policy decisions in various areas, including monetary policy, fiscal policy, and wage and price controls. As Central banks are responsible for maintaining price stability, they often have an inflation target that they aim to achieve. Dr Stenfors also explained how inflation-targeting policies aim to keep inflation within a certain range, typically around 2% per year, to ensure economic stability and growth. As such, Central banks may adjust interest rates, control the money supply, or engage in other policy actions to manage inflation.
On the other hand, the government can also be affected by inflation, particularly the Fiscal policy. High inflation can erode the value of government revenue and increase the cost of servicing debt, which can limit the government's ability to spend on other programmes. Inflation can also affect wage and price controls, as high inflation can lead to demands for higher wages to keep up with the rising cost of living. Governments may intervene to control prices or limit wage increases, but these policies can be controversial and difficult to implement. Dr Stenfors illustrated this point with an example of the controversial Mini Budget announced by the UK Government in 2022 that led to market turbulence which resulted in the resignation of the then UK Prime Minster and Chancellor.
In summary, Dr Stenfors talked about how inflation is a critical factor in policy making as it impacts economic stability, growth, and the well-being of individuals and businesses. He suggests that policymakers must consider inflation when making decisions in areas such as monetary policy, fiscal policy, and wage and price controls to maintain price stability and promote economic growth.
It was a very stimulating seminar in which Dr Stenfors was very knowledgeable and engaging. He made the complex concept of inflation and market turbulence easy to understand. The seminar was relevant and insightful, with key ideas that are related to the content of our students’ programmes. Our staff and students found the seminar very interactive and a valuable and enriching experience. We thank Dr Stenfors for sharing his knowledge and expertise with us and we certainly hope that he would be able to come back to the UK Campus and share his experiences with us.
