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Inflation-wary institutions fear rate hikes

EUROPE - Institutional investors are forecasting higher short and long-term interest rates amid growing concerns of rising inflation, a survey has found.

Merrill Lynch's monthly global fund manager survey for June found a net 47% of the 201 fund managers who participated in the research "now expect global core inflation to be higher one year from now" - in comparison to 11% in March.

According to the survey, institutional investors are concerned monetary policy is not yet tight enough to combat inflation, and nearly 60% of respondents predicts higher long-term rates.

Just over 40% forecast higher short-term rates, the survey also found.

David Bowers, independent consultant to Merrill Lynch, commented investors are beginning to question their equity valuations as a result of their interest-rate outlook.

"Despite the recent back-up in bond yields, asset allocators remain overweight in equities and underweight in bonds," said Bowers.

"But were rates to rise they could start to cause problems for equity valuations," he added.

Merrill Lynch said it shares investors' concerns that inflation could pick up, but does not believe prospects for global growth outside the US are under threat.

Nonetheless, Roderick Munsters, chief investment officer of Dutch pension giant ABP - at €212bn the world's second-largest pension fund - has commented inflation is also a concern for his own fund.

Speaking in Brussels two weeks ago, Munsters commented: "Pension funds need to be wary of inflation", adding "It is also a concern we have, not a large concern, but we are keeping an eye on it".

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