SYDNEY (Reuters) - Investors are underpricing the risk of higher interest rates globally and need to seek adequate compensation for that risk, Guy Debelle, Deputy Governor of the Reserve Bank of Australia said in a speech in Sydney on Friday.
Policymakers have repeatedly warned about a sense of complacency in global markets with stock prices, in particular, hovering around record highs.
However, market participants have failed to heed the advice with a gauge of volatility remaining near all-time lows even as U.S. interest rates continue to rise.
"There have been factors behind the low structure of interest rates which are difficult to understand completely and raise questions about its durability," he said.
"In particular, I find it puzzling that there is little compensation for duration in the rate structure."
"At the same time, equity prices embody a view of the future that robust growth can continue without generating a material increase in inflation. Again, there is little priced in for the risk that this may not turn out to be true."
A gauge of world shares, the MSCI index rose more than 21 percent in 2017, the highest returns since 2009, even as the U.S. Federal Reserve increased interest rates three times that year.
The euphoria continued in 2018 until fears of faster Fed rate rises caused a sudden sell-off in global shares in February.
Debelle said that spike in volatility was only "a small example of what could happen following a larger and more sustained shift upwards in the rate structure."
He noted that he has predicted higher markets volatility in the past only to be proven wrong.
"But I think there is a higher probability of being proven correct this time."
(Reporting by Swati Pandey and Wayne Cole)
