Rates won't fall back to pre-pandemic levels as geopolitical conflict and supply chain issues create problems for world economies, BofA exec says

• Last month, the Fed joined a slew of central banks in easing monetary policy.
• That's led the market to assume rates will fall to pre-pandemic lows, BofA's Bernard Mensah says.

The Federal Reserve joined other central banks in easing monetary policy last month, but that doesn't mean rates are returning to ultra-low levels see in the years before the pandemic, Bank of America's Bernard Mensah said.

Mensah, the bank's head of international operations, pointed to a range of factors that could boost inflation, like shifting supply chains, rising wages, and geopolitical risks.

"My instinct has been that all of those things add inefficiencies in the system, and as we're moving to a different, perhaps, type of globalization, that we might find that the underlying trend inflation rate is a little bit higher than before," Mensah said in a Wednesday interview with Bloomberg TV.

Mensah's comments come amid a flurry of rate cuts from central banks in the US, China, the EU, England, Switzerland, Sweden, Canada and Mexico, among others.

Those rate cuts have led the market to expect US interest rates will dip as low as they were before the pandemic, Mensah says.

"There are bits of the market that do assume that rates will trend back to where we were pre-COVID or soon after that," Mensah said. He adds that the terminal rate may actually be 150 basis points above that.

Before the pandemic, in the decade following the Great Financial Crisis, interest rates remained at historical lows. However, as inflation soared, the Fed hiked its benchmark interest rate aggressively, initiating its first move to loosen monetary policy last month with a 50 basis point rate cut.

Despite the Fed's apparent confidence that pricing pressures have eased, Mensah says a variety of inflationary risks will keep interest rates higher.

"I personally have been worried just about the underlying inflationary pressures that are out there for a bunch of reasons, whether its COVID, whether its supply chain moves," he said.

He also pointed to inflationary shocks like the US port strike, which started on Tuesday and is expected to continue for weeks.

Mensah says the port workers' wage demands, as well as increasing wages for workers around the world, add further inflationary pressure.

Finally, he noted geopolitical risks, which he says have weakened the dollar's value as global markets have priced in new developments.

"I do think the market is trying to be alert to events that are happening on the horizon," Mensah said, adding there's been a dollar weakening versus the euro and British pound in broad foreign exchange markets.

"You can make some arguments for that. So I think the market is poised for challenges that are ahead," he said.

Other analysts have also pointed to inflation risks from geopolitical conflicts.

Last month, T. Rowe Price analyst Tomasz Wieladek said that even though trade openness has encouraged inflation stability, ongoing conflicts could mean globalization is at risk in the coming years. That could drive up global inflation, he said.