We are at an inflection point with regards to global monetary policy and liquidity. Some major central banks have already started tapering asset purchases, while others are inching closer to doing so. In EM, some central banks are already hiking or about to. We are moving towards a point in which global liquidity is no longer as supportive for EM and other risk assets, and we simply hope that markets get enough lead time to adjust. This piece lays out our views on the major central banks going forward, while the next ones will cover EM central banks and then address the ways in which the liquidity inflection point will matter for global financial markets.
We do not believe that tapering discussions have been derailed by the jobs report, and we expect the official June 15-16 FOMC statement and minutes to confirm this. That said, the Fed is likely to remain in the early stages of the discussions and will refrain from setting out any sort of timetable until later this year. Key dates to watch for ahead are FOMC meetings July 27-28 and September 21-22, along with the Jackson Hole Symposium August 26-28. Consensus sees Fed tapering in 2021 and hiking rates late in 2022, which are ultimately dollar-supportive if underpinned by an economic recovery and not just rising inflation expectations.
After the minutes to the April FOMC meeting were released last month, several Fed officials unleashed their inner hawks. Kaplan was already on record as wanting tapering to begin soon. Harker joined Kaplan by saying that the Fed should talk about tapering sooner rather than later, though this was conditional on seeing progress on inflation and jobs. Barkin said that the economy's upswing is moving the Fed closer to tighter policy. Bullard said the Fed is close to launching discussions about tapering its QE. Both Fed Vice Chairs Clarida and Quarles joined the chorus of officials talking about talking about tapering. Perhaps Powell will be next to shift his tone? Again, this is not to say that rate hikes are around the corner. However, we think that the Fed is getting ready to take their foot of the gas pedal. And to beat that analogy to death, they are simply moving from "pedal to the metal" to something a bit more prudent as we enter an unknown (inflation) curve in the road at a relatively high speed.
New macro forecasts and Dot Plots will be released at the June 15-16 FOMC meeting. The median GDP forecasts from March (December) were 6.5% (4.2%) in 2021, 3.3% (3.2%) in 2022, and 2.2% (2.4%) in 2023 while the median core PCE forecasts were 2.2% (1.8%) in 2021, 2.0% (1.9%) in 2022, and 2.1% (2.0%) in 2023. Unemployment was seen at 4.5% (5.0%) in 2021, 3.9% (4.2%) in 2022, and 3.5% (3.7%) in 2023. According to the Fed’s March projections, it will have met its dual mandate by the end of 2023. We suspect that the macro forecasts will be upgraded at next week’s meeting. But will the Fed still signal no rate hikes are seen until 2024?
Recall that in the March 16-17 Dot Plots, four FOMC members saw the first hike in 2022 but the median was in 2024. The June 15-16 Dot Plots will be very interesting, and we suspect that more than four will see the first hike coming in 2022 but so far still short of the number needed to pull the median timing forward. The Fed Funds futures strip shows solid odds starting for the first hike in Q3 22. Those odds quickly jump in Q4 22 to nearly fully priced in Q1 23. Similarly, Bloomberg consensus sees the policy rate at 0.25% until at least Q2 22, when odds of a hike start getting priced in.
Bank of Canada delivered a hawkish hold at its last meeting on April 21. It tapered its weekly asset purchases to CAD3 bln from CAD4 bln previously while keeping rates unchanged at 0.25%. More importantly, its updated macro forecasts suggest earlier than anticipated rate hikes. The bank saw slack in the economy absorbed and inflation at the 2% target in 2022. It then added that its projections show the commitment to keep rates steady runs to H2 2022. Previously, the guidance suggested no hikes until "into 2023" so this is a very hawkish signal from the BOC. Next policy meeting is June 9. Of note, Bloomberg consensus sees the policy rate at 0.25% until at least Q4 22.
European Central Bank delivered a dovish hold March 11 and confirmed that stance at its last meeting on April 22 . All rates were kept steady and the PEPP envelope was left unchanged at EUR1.85 trln. However, the bank said its asset purchases in Q2 would “be conducted at a significantly higher pace than during the first months of this year.” The account of the March meeting showed that the accelerated pace would be reviewed after three months so it's really not surprising that Madame Lagarde said that the ECB didn’t discuss phasing out PEPP at the April 22 meeting. She added that the pace of the purchase program is data-dependent, not time-dependent. Next policy meeting is June 10 and the accelerated pace is widely expected to be maintained in Q3. New macro forecasts will be released, and growth and inflation projections are likely to be revised higher. Yet the doves should have no problem maintaining the upper hand. Since the ECB announced accelerated asset purchases at the March 11 meeting, eurozone yields have still risen and so it’s simply too early to sound the all clear. Both net and gross purchases have picked up noticeably over the last few weeks, averaging EUR20 bln and EUR25 bln per week, respectively, and yet eurozone yields are still higher. Of note, Bloomberg consensus sees the policy rate steady at 0% through Q3 2022.
Bank of England delivered a hawkish hold at its last meeting on May 6. Rates were kept steady but the bank announced the start of tapering. The bank reduced the weekly pace of asset purchases to GBP3.4 bln, down GBP1 bln from the current pace of GBP4.4 bln. Bank officials insisted this was an “operational decision” that shouldn’t be interpreted as a shift in their policy stance. Of note, by our calculations, the old pace would see QE hit the GBP875 bln limit in September while the new pace would see QE hit the limit in October. Given the bank’s intent to have QE run to year-end, this suggests another tapering is in the cards. Chief Economist Haldane was the lone vote to cut the size of QE to GBP825 bln. However, he is on the way out after the June meeting and so Haldane’s dissent doesn't carry as much weight as it otherwise might. Of note, the short sterling futures strip suggests some odds of the first hike in Q4 2021, rising significantly in Q1 and Q2 2022 to being fully priced by Q3 2022. Next policy meeting is June 24 and no change is expected.
Swiss National Bank delivered a dovish hold at its last meeting on March 25. The bank softened its language on the need to intervene in FX markets, but still characterized the franc as still “highly valued.” SNB pledged to continue FX interventions “as necessary” rather than the stronger language introduced last year to intervene “more strongly.” The policy rate is likely to remain at -0.75% for the foreseeable future. At the March meeting, the SNB affirmed its 2021 GDP growth forecast from December at 2.5-3.0% but raised its inflation forecasts for 2021 and 2022 due to the weaker franc and higher oil prices. SNB President Jordan stressed that “We have to continue with our expansionary monetary policy. The economic environment has to change considerably before we can think about changing monetary policy.” Next policy meeting is June 17 and no change is expected.
Norges Bank delivered a hawkish hold on March 18 and confirmed that stance at its last meeting on May 5. Rates were kept at zero but the bank updated its rate path in March to show hikes starting in Q4 2021 and the policy rate near 1.0% by mid-2023 and 1.5% by end-2024. At the previous meeting January 21, the bank signaled likely lift-off in H1 2022 and the policy rate near 1.0% by end-2023. Next policy meeting is June 17 and no change is expected. The bank will release updated macro forecasts. In March, GDP growth was forecast at 3.8% (vs. 4.0% in December) in 2021, 3.4% (3.1%) in 2022, and 1.2% (1.6%) in 2023. 2024 was added to forecast horizon at 1.0%. CPI inflation was forecast in March at 2.8% (vs. 2.2% in December) in 2021, 1.1% (2.0%) in 2022, and 1.5% (1.7%) in 2023. 2024 was just added to forecast horizon at 1.7%. Of note, Bloomberg consensus sees the policy rate at 0.25% at end-2021, rising to 0.5% by mid-2022.
Sweden’s Riksbank delivered a dovish hold at its last meeting on April 27. The bank said that “monetary policy needs to remain expansionary to support the economy and for inflation to be close to the target of 2% more permanently.” It kept rates steady at 0.0% and maintained its QE program at SEK700 bln, where it’s been since it was last expanded by SEK200 bln in November 2020. Similar to the February meeting, the Riksbank said that its QE program will be fully utilized by the end of 2021 and that its size will be maintained at least until end- 2022. At the same time, the bank again noted that it’s possible for the repo rate to be cut if needed, but we believe it does not want to go negative again and will instead rely on further QE if more stimulus is needed. The flat rate path was extended another quarter to Q2 2024. The Riksbank raised its 2021 and 2022 inflation forecasts to 1.4% (1.3% previously) and 1.5% (1.3% previously), respectively, but cut its 2023 forecasts to 1.7% (1.8% previously). Of note, the forecasts show inflation reaching the 2% target in early 2024. Next policy meeting is July 1. Of note, Bloomberg consensus sees the policy rate at 0% through Q3 22.
The Bank of Japan delivered a dovish hold at its last meeting on April 27. The policy rate remains at -0.1% and the 10-year yield target at 0.0%. Recall that the bank unveiled its policy review at the previous meeting March 19 and widened its target range for the 10-year JGB yield to +/- 25 bp around 0% vs. +/- 20 bp previously. In a lengthy analysis, the BOJ concluded that capital spending is mostly unaffected by fluctuations that are within 0.5 percentage point. This suggests it is unlikely that the bank will widen the band further. New forecasts were unveiled in April. The bank sees targeted core inflation at 0.1% (0.5% previously) for FY2021, 0.8% (0.7% previously) for FY2022, and 1.0% for FY23, which was added to the forecast horizon. Of note, the large downward revision to FY21 was partially due to a reduction in mobile phone costs. Still, the bottom line is that core inflation is seen remaining below the 2% target through FY23. As such, the BOJ will signal that it intends to keep policy accommodative until FY24 at least. Growth is forecast at 4.0% (3.9% previously) for FY2021, 2.4% (1.8% previously) for FY2022, and 1.3% for FY23. Next policy meeting is June 17-18 and no change is expected then.
Reserve Bank of Australia delivered a dovish hold at its last meeting on June 1. All policy settings were left unchanged and the RBA repeated existing forward guidance that rate hikes won’t be seen until 2024 “at the earliest.” Governor Lowe said that “Despite the strong recovery in the economy and jobs, inflation and wage pressures are subdued. The board is committed to maintaining highly supportive monetary conditions to support a return to full employment in Australia and inflation consistent with the target.” Lowe added that “An important ongoing source of uncertainty is the possibility of significant outbreaks of the virus, although this should diminish as more of the population is vaccinated. The board continues to place a high priority on a return to full employment.” The bank will decide at the next meeting July 6 whether to extend Yield Curve Control and shift its target from the April 2024 bond to the November 2024 bond. It will be a close call. Of note, Bloomberg consensus sees the policy rate steady at 0.10% through Q3 22.
Reserve Bank of New Zealand unexpectedly delivered a hawkish hold at its last meeting on May 26. As expected, it kept the official cash rate steady at 0.25% and maintained its QE at NZD100 bln. However, the bank caught markets off guard by projecting the first rate hike in H2 2022. The bank sees the average OCR rising to 0.67% by end-2022, implying 1-2 hikes, and then to 1.78% by mid-2024, the end of the forecast period. That is a very hawkish rate path that we find highly unlikely. Of note, the RBNZ resumed its practice of publishing its cash rate forecasts after a pause of more than a year but stressed that the projections were “conditional on the economic outlook evolving broadly as anticipated.” This was quite a U-turn from the previous meeting April 14, when the RBNZ delivered a dovish hold by saying that gaining enough confidence to remove accommodation “is expected to take considerable time and patience.” Next policy meeting is July 14 and no change is expected then. Of note, Bloomberg consensus sees the policy rate steady at 0.25% through mid-2022, with odds of the first hike starting to rise marginally in Q3 22.