TAPERING DOESN’T MEAN TIGHTENING
Ultra-loose monetary policy is expected to continue globally for a while as supply-chain constraints remain across all sectors
The cumulative rise in worldwide policy rates so far remains less than previous hiking cycles — meaning most central banks will remain supportive next year.
Global monetary policy looks set to stay super easy well into 2022 even as central banks edge closer to dialling back their emergency support in the face of mounting inflation pressures. In the last week, the US Federal Reserve signalled it will start paring its massive bond-buying as soon as November and the Bank of England hinted that it may raise interest rates this year. Norway became the first developed economy to hike and borrowing costs were also increased in Brazil, Paraguay, Hungary and Pakistan.
Behind the pivot is the sense that inflation is proving more stubborn, with the Organisation for Economic Cooperation and Development raising forecasts to show consumer prices rising 3.7 per cent in the Group of 20 in 2021 and 3.9 per cent next year.
Supply-chains are strained for everything from semiconductors to cars, food and energy prices are surging, some labour markets are already displaying skills shortages and demand is picking up after lockdowns. At the same time, the worldwide recovery isn’t secure, complicating the task of central bankers as some even face the prospect of stagflation — in which inflation climbs and expansion slows amid the spread of the delta variant and with many still not vaccinated. Global manufacturing activity continues to slow.
There is also a divergence. The Bank of Japan last week gave no indication of a withdrawal of stimulus, while the People’s Bank of China injected the most short-term liquidity in eight months into the financial system as embattled property giant China Evergrande Group kept markets on edge. The European Central Bank has pushed back against suggestions of a taper. Turkey has slashed rates albeit amid pressure from its government.
And even the Fed has changed its strategy since it was last raising rates, arguing now its OK to let the US economy run a little hotter than traditionally in the hope doing so pushes down unemployment and brings more into the workforce.
Status quo likely
The upshot is while some rich nation central bankers may be preparing to tap the brakes and many emerging markets are already clamping down, ultra-loose monetary policy will continue globally for a while. JPMorgan Chase & Co. economists estimate developed market central banks will still add a net $1.5 trillion in assets to their balance sheets next year and that global rates will rise only 11 basis points over the next year to an average of 1.48 per cent, still about 80 basis points below their pre-pandemic level.
The cumulative rise in worldwide policy rates so far remains less than previous hiking cycles — meaning most central banks will remain supportive next year, according to analysis by economists at UBS Group AG.
Investors are nevertheless tuning into a change in tone amid concerns that rising prices previously dismissed as transitory now appear to have longer staying power.
According to the Fed’s preferred measure, US inflation was 4.2 per cent in the 12 months through July, well above the central bank’s 2 per cent target. The Bank of England now expects inflation to exceed 4 per cent, also breaching its goal.
Others may soon be shifting. Mexico and Colombia are set to raise rates this week, while New Zealand and South Africa could also begin tightening before the end of the year. It’s possible that central bank officials are deliberately hosing down the inflation threat in an attempt to contain expectations. Warning of a structurally higher rate would only cement the outlook, according to Teresa Kong, a portfolio manager at Matthews International Capital Management LLC in San Francisco.
Tread carefully
Whatever they do, central banks will need to tread carefully, according to James Rossiter, head of global macro strategy at TD Securities. Among the risks he identified in a recent report to clients are overreacting to temporary inflation overshoots, delaying tightening on growth concerns until it’s too late and hiking the same moment governments restrain fiscal policy.” Central bankers are now turning their attention to removing accommodative Covid-related monetary stimulus,” he said. “While well-telegraphed, this process is unlikely to proceed as smoothly as both central banks and markets hope.”