Inflation Bet Has $105 Billion Danish Fund Sounding Alarm

Central bankers are engaged in a dangerous bet if they let their concerns over economic growth outweigh the need for inflation targeting, according to the chief executive of one of the biggest Nordic pension funds.

Allan Polack, the CEO of the $105 billion PFA fund in Copenhagen, says the current focus of policy makers at the world’s most powerful central banks risks feeding asset bubbles, adding to wealth inequality and ultimately destabilizing societies.

“The old way of running central banks, the way it used to be, was very, very different from now,” Polack said by phone. “It’s very clear that purchasing power is a secondary priority.”

Denmark’s pension industry is among the best-managed in the world, according to the Mercer CFA Institute Global Pension Index. Fund managers in the country have responded to years of ultra-low interest rates by stocking up on less liquid assets, such as infrastructure and real estate in pursuit of higher returns. But the reallocations have also drawn warnings from the financial watchdog, amid concerns that funds are taking on risks that are hard to price.

“The problem is that we went from one crisis into another regime, so we have capital markets that haven’t found an equilibrium,” Polack said. Ultimately, the current approach to monetary policy “means that we will have discussions on how we will stabilize our society, because the asset inflation is very, very clear.”

Wealth Gap

Polack says much of his concern as a pension fund CEO is that the current regime is fanning a wealth gap, “particularly between generations.” Part of the problem is that it’s now unclear how markets will react if inflation starts to return, he says.

For PFA, a “key focus” has become monitoring inflation expectations for 2022 and 2023. Meanwhile, the 2-year U.S. breakeven rate, which measures the difference between inflation-linked and nominal bonds and is a reflection of inflation expectations, reached a high of 2.6% this week. That’s more than a percentage point above its level a year ago.

And some of the world’s best known money managers have started pointing to inflation risks. Pacific Investment Management Co. is among those voicing concerns over faster price growth and the threat it poses to investors.

But with central bankers from the U.S. to Sweden increasingly signaling they’re willing to tolerate higher-than-target prices as part of their broader strategies, it’s not clear how an acceleration of inflation will affect markets, Polack said.

“Macro and rates aren’t following each other any longer, because rates are set in a very political context through monetary policy,” he said. “And as a pension fund, we are worried.”

©2021 Bloomberg L.P.

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