As economies start to overcome the pandemic downturn, major banks are now heading towards policy normalization. The Federal Reserve is in the lead, by signaling possible asset purchases tapering in the next few months as the economy approaches full recovery. The Bank of England joined the hawkish team, hinting that persistent high inflation may require modest tightening in the near term. Elsewhere in Switzerland and Japan, both central banks kept their loose monetary policy in place, as local economies are still lagging behind.
Fed on Track to Reduce Stimulus This Year
Federal Reserve officials hinted on Wednesday that a reduction in asset purchases may be needed with a growing number expect an interest rate hike in 2022. The updated dot plot showed that nine members are now expecting an increase in federal funds rate next year as the economy sustains recovery towards the committee’s goals; stable inflation around 2% and maximum employment. The central bank kept the funds rate unchanged at 0.25% during its September meeting.
Fed chair Jerome Powell said during the press conference that asset purchases supported the economy since the pandemic and are still useful but it’s time to begin taper them. The bank is anticipated to announce tapering its massive stimulus programme as soon as November, the next meeting. While the stimulus programme may be ended completely by the middle of next year.
The federal committee downgraded growth forecasts for this year. The national GDP is now expected to grow by 5.9% in 2021, instead of 7.0% previously estimated in June. GDP growth for 2022 and 2023 are seen to accelerate to 3.8% and 2.5% from 3.3% and 2.4% respectively. Forecasts for PCE inflation were revised up from 3.4% to 4.2% this year, and from 2.1% to 2.2% next year. The committee also expects the unemployment rate at 4.8% this year, 3.8% for 2022 and 3.5% in 2023.
BoE Hints Possible Tapering Ahead
The Bank of England left interest rate at a record low of 0.1% and maintained by a majority of 7-2 its asset purchases unchanged at £895 billion until the end of this year. The bank acknowledged that the case for modest tightening strengthened from August, as inflationary pressures seem to be more persistent.
The committee expects inflation to reach 4% by Q4 due to higher energy and goods prices. While Q3 GDP forecasts were lowered by nearly 1% to around 2.5% below its pre-Covid level.
Although considerable uncertainties remain, the bank sees that recent economic development may warrant modest policy adjustments. Two MPC members, Dave Ramsden and Michael Saunders voted for a reduction to government bond purchases by 35 bn. Unlike the Federal Reserve, the first tapering move from the Bank of England could be a rate hike, possibly by 0.15%, and will likely end the asset purchase in December as scheduled.
BoJ Sticks to its Ultra-Loose Policy
The Bank of Japan left its key interest rates unchanged at -0.1% and maintained the target for the 10-year government bond yield at around 0% during its September meeting by an 8-1 vote. The statement portrayed a duller view on exports and factory output, due to supply-chain disruptions. Employment and income remained weak due to the COVID-19. Private consumption stayed stagnant, due to continuing strong downward pressure on consumption of services.
The annual CPI inflation rate has been around 0% and inflation expectations have not been unchanged. The BoJ reiterated it will not hesitate to take more easing measures if necessary, expecting short-and-long-term policy rates to remain at their present or lower levels.
No Policy Changes from SNB as Expected
The Swiss National Bank kept the policy rate unchanged at -0.75% as widely expected by market participants. The bank stated that maintaining an expansionary monetary policy is still required to ensure price stability and provide support to the national economy. Unlike the BoE, ECB and the US Fed that are planning to start policy normalization in reaction to post-pandemic recovery, the SNB is seen to keep its current policy stance for a longer period.
The SNB raised its inflation forecasts slightly from 0.4% to 0.5% for 2021 and from 0.6% to 0.7% for 2022 due to higher prices for oil products as well as supply bottlenecks. For 2023, inflation forecasts were kept unchanged at 0.6%. On the other hand, GDP growth was revised lower to from 3.5% to 3% for this year, while it is likely to return to its pre-crisis level by the second-half of the year. As usual, the SNB repeated its willingness to intervene in foreign exchange markets as necessary to keep upside pressures off the franc, which is still seen as highly valued.
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