Central bankers plan a training course to the end of the easy minefield – News Couple

Central bankers plan a training course to the end of the easy minefield

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Global central bankers are heading towards tighter monetary policy, yet they still indicate that they will take longer and follow different paths than investors currently expect.

This week only:

  • The Fed confirmed it would start slowing its asset purchase program, but Chairman Jerome Powell said he would not consider raising interest rates until the labor market rises further.

  • The Reserve Bank of Australia dropped a pledge to solidify short-term bond yields and indicated that it had no plans to raise the benchmark interest rate anytime soon.

  • The Bank of England defied market expectations of no interest rate hike, while sticking to the view that they would still need to rise in the “coming months”.

  • At the tighter end of the spectrum, Poland and the Czech Republic have tightened interest rates, and Norway has indicated it will do so again in December.

With inflation strengthening and growth slowing, most policymakers in advanced economies are faced with a balancing act in which risks are roughly shared between acting too fast or too slow. This increases the chances of surprising the markets and making a policy mistake.

Global bonds rose this week as the interest rate hike bets that spurred an epic sell-off in October collapse. The US 10-year yield fell 8 basis points to 1.53% on Thursday, the biggest drop since August, while the Australian three-year yield saw its biggest drop in a decade, reversing part of last week’s rally that was the sharpest since 2001. As a result, officials are likely to proceed cautiously and at varying speed, although investors have pressed for a faster end to easy money with bets that the Bank of England will raise in February, the Federal Reserve in June and even that the European Central Bank will reverse its pessimistic stance at some point. What in 2022. “We are probably entering the most interesting phase of global monetary policy in living memory, that is, if you are under 50 or so,” according to Chris Marsh, senior advisor at Exante Data LLC. While those who witnessed the 2008 financial crisis and the fallout from the pandemic last year may disagree with this view, economists at JPMorgan Chase & Co. estimate that by the end of the year, about half of the 31 central banks they track will have raised their standards from the past. lowest levels of the year.

The driver behind most of the shifts is that inflation is proving to be broader and more stubborn than previously expected, with post-lockdown demand, strained supply chains, tightening labor markets and rising commodity costs driving prices higher and possibly longer. Whether these forces wear off, as most central bankers still expect, will ultimately determine what happens next.

Every policy maker will want to avoid the famous mistakes the European Central Bank made in 2008 and 2011 when interest rates were boosted only to evaporate the threat of inflation and dampen growth. Some, including the Federal Reserve, will also want to test new strategies to allow inflation to get hotter than it has been in the past in order to bolster a recovery in growth and employment. “The inflation we’re seeing isn’t really due to a tight labor market,” Powell, who wasn’t sure he would even get a job himself in February, said on Wednesday. The opposite risk is that if central banks wait too long and inflation doesn’t abate, expectations about it among businesses and consumers could become embedded, creating a price spiral that is hard to curb and threatens to roil markets. Some emerging markets, including Brazil and Russia, are already aggressively tightening policy in the face of surging prices. Norway, South Korea and New Zealand also started raising interest rates.

Economists are betting that most central bankers will proceed with caution. JPMorgan Chase expects global policy rates to end next year about three-quarters of a percentage point below their 2019 average. “Central banks are divided on inflation risks, and therefore we believe that bond markets have already priced in,” said Mansoor Mohieldin, chief economist at Bank of Singapore Limited. Lots of upside in 2022.” At Nomura Holdings Inc. Economists led by Rob Subbaraman also say the gains will be more limited than in previous cycles because the pandemic has left scars that will limit the rate of growth of economies before they fuel inflation. They expected global growth to average around 2.5% in the next decade, down from 2.8% in the post-financial crisis years and 3.4% before 2008. “Central banks will not need to raise interest rates aggressively to tighten interest rates,” Nomura economists said in a report. financial conditions to keep inflation under control or ease pressures on the economy. “It is likely that the so-called final rate will be lower than in previous cycles.” Krishna Guha, head of central bank strategy at Evercore ISI, isn’t entirely sure. He suggests that the Fed will remain on hold until December 2022, but after that it will move “a little bit faster, a little further.”

Even with some tightening, economists at Berenberg Bank expect “asynchronous monetary policy normalization” given that central banks tend to rise at their own pace even if they loosen simultaneously when shocks like COVID-19 occur. Already, European Central Bank chief Christine Lagarde is lobbying against market bets to raise interest rates in 2022, saying this week that conditions for them are “unlikely to be satisfied next year”.

This was echoed by RBA Governor Philip Lowe, who said he was “in conflict with the scenario that would require a rate hike next year”.

Japan’s new government and central bank confirmed this week that they will continue cooperating to achieve 2% inflation, a strategy that should dampen market speculation about any early stimulus exit there.

Even Andrew Bailey, governor of the Bank of England, told Bloomberg that the pricing is currently “a little bit exaggerated”. Minds can change quickly though. The Fed fell sooner than onlookers thought earlier this year. As recently as late September, Bailey was saying that the UK economy was facing “difficult arenas”. said Catherine Ness, chief European economist at PGIM Fixed Income.

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