in the longer term higher interest rates could exacerbate any inflation caused by global supply factors by deterring capital investment mahesh agrawal assistant director at financial consultants acuity knowledge partners said in an interview with dow jones newswires higher borrowing costs help bring down inflation by dampening domestic demand but they have limited impact on supplyside inflation he said supplyside inflation includes increases to prices of food and energy—which in turn lifts manufacturing costs—due to reduced supply following events such as the war in ukraine sanctions against russia and poor harvests “what interestrate hikes can do is weigh on domestic demand but they can’t increase the supply” agrawal said “it can even possibly exacerbate the supply shock because capital investments can come down” in this way central banks could risk adding to the problem rather than solving it he said this is more of a longerterm rather than a shortterm risk it could take two to three years to become evident because decisions on capital investments are longterm and take time to implement he said in the short term agrawal thinks inflation will come down from current very high levels but it won’t fall sharply lower food and energy prices compared to a year ago have helped to bring down inflation but core inflation—which excludes these volatile elements—have been slow to come down he said eurozone annual core inflation stood at 53 in may the latest figures for the uk showed core inflation at 68 in april “we believe inflation will be stickier in many of the locations especially in the eu where it is still highly dependent on russian energy although they have diversified quite a lot over the last year” europe was lucky that last winter was relatively warm but if the coming winter turns out to be cold it could lead to another jump in energy prices a protracted war in ukraine could also bring back high energy and food inflation “we can’t absolutely rule out those possibilities” he said “if this winter turns out to be cold it would be again energy shortages and energy prices spiking up to the kind of prices we have seen last year” high inflation will mean interest rates will have to stay high in the eurozone and the uk while only the us may be in a position to cut rates this year as it’s less reliant on other countries for raw materials “the maximum we can expect this year from the ecb and the boe is a pause there is absolutely no possibility of rate cuts this year” agrawal said however there is a high chance of the us federal reserve starting to cut rates this year he said this backdrop doesn’t favor the dollar which is “significantly higher compared to historical levels” and agrawal expects the us currency to fall over the next two to three years although in the short term it could continue to appreciate “the dollar looks a bit overvalued currently and it would be a good strategy to keep your fx portfolio towards safer havens” he said “there’s a lot of uncertainty about inflation and a lot of uncertainty about economic growth” he said adding that it makes sense to buy the swiss franc the japanese yen or gold us debt and even eurozone and uk debt is also a good investment he said emergingmarket debt has higher risk however as diminishing rate differentials cause investors to move back into developedmarket bonds “safe havens are a good avenue for investments potentially this year and next year”