In its Sector-In-Depth note titled 'Macroeconomics - Global: FAQ on Our Outlook for Global Inflation and Interest Rates', Moody's said in 2022, the base effects will reverse and the impact of price increases amid reopening pressures will fade.
However, it acknowledged that there are considerable uncertainties around its forecasts.
"Positive surprises on the demand side or more extensive supply disruptions could strengthen inflation further, particularly in the United States (US),” it said.
It expects most central banks in advanced economies to reduce policy accommodation gradually, the pace of which to be determined by domestic economic conditions.
It noted that several emerging market central banks are already raising policy rates, and others are likely to follow in the coming months despite an incomplete recovery and downside risks to growth.
"The tightening cycle will continue in the coming months, especially if inflation pressures do not moderate.
"Central banks face a tough trade-off. On the one hand, low interest rates and liquidity are necessary to support economic activities, which is only slowly turning up, and on the other hand, the risk of inflation expectations shifting up may prompt policy tightening," said Moody's.
Meanwhile, it emphasised that its forecasts assumed that global benchmark interest rates would increase from current lows, but settle around levels consistent with the pre-pandemic low natural real interest rate trends, as many of the long-term secular factors driving interest rates down remain in place.
"A change in savings and investment dynamics could also shift the interest rate outlook,” it said.
On concerns that could arise from a tightening of the US' monetary policy, it said that tighter financial conditions in the US would lead to a rise in risk aversion and deterioration in investor sentiment.
"A repricing of risks could result in large losses, which could reverberate through the global economy," said Moody's.
Meanwhile, it noted that higher prices for commodities, intermediate products, logistics costs and in some cases, labour, are resulting in higher input prices, thus affecting earnings and margin growth for non-financial corporates.
"Higher input costs are affecting companies very differently, depending on their ability to pass on cost increases and supply constraints.
"For example, commodity producers and container shipping and logistics companies are benefiting from higher prices, but firms further along the supply chain, such as auto companies, are facing cost pressures and input shortages,” it said.
It noted that with the revival of the global economy from a near-complete shutdown last year, prices for goods and services have increased across the globe.
"Acute supply shortages associated with a variety of factors ranging from shipping bottlenecks to labour supply disruptions have raised input costs and created unusual market distortions during this recovery," it added. - Bernama