As economies start to overcome the pandemic downturn, major central banks are now heading towards policy normalization. Paths of monetary policy are still highly dependent on how successful the economies fight against the new delta strain and the potential risks from a fresh autumn wave.
The Federal Reserve is leading central banks’ tightening cycle signaling possible asset purchases tapering in the next few months as the economy approaches full recovery. The Bank of England followed the hawkish team, hinting that persistent high inflation may require modest tightening in the near term.
The Reserve Bank of Australia indicated that scaling back asset purchases may be premature at this point. The Bank of Canada keeps policy on hold while monitoring closely. The European Central Bank intends to slow its PEPP’s asset purchases.
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 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, that supported the economy since the pandemic, are still useful but it’s time to begin to 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.
ECB Tapers Bond Buying under PEPP
The European Central Bank will conduct a moderately lower pace of net asset purchases under the pandemic emergency purchase programme (PEPP) than in the previous two quarters. During its September’s meeting, the bank decided to keep the interest rates on the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25% and -0.50% respectively.
The bank expects inflation to stabilize at 2% over the medium term, after a transitory period in which inflation is moderately above target.
Meanwhile, the bank will continue net purchases under the APP at a monthly pace of €20 billion. The Council expects asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.
The ECB also updated its growth and inflation forecasts. Inflation is now seen at 2.2% in 2021 vs 1.9% estimated in June, 1.7% in 2022 vs 1.5%, and 1.5% in 2023 vs 1.4% previously. The bloc’s growth is expected to expand by 5% in 2021 vs 4.6%, for 2022 growth was downgraded from 4.7% to 4.6% and forecasts for 2023 growth was maintained at 2.1%.
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.
RBA extends Asset Purchases to support Recovery
The Reserve Bank of Australia kept the interest rate at 0.10% in its September meeting as widely expected. However, the policy statement reflected a shift in the bank’s evaluation of the economy during the coming months. The bank stated that recovery in the Australian economy has been interrupted by the Delta outbreak and the associated restrictions on activity. GDP is expected to decline in the third quarter and the unemployment rate will move higher over coming months.
The statement acknowledged that prior to the Delta outbreak the Australian economy had considerable momentum with GDP increasing by 0.7% in the June quarter and by nearly 10% over the year. Business investment was picking up and the labour market had strengthened. The unemployment rate had fallen below 5% and job vacancies were at a high level.
The bank has kept its optimistic view of the economy, stating that this setback to the economic expansion is expected to be only temporary. The Delta outbreak is expected to only delay the recovery. It sees the economy bouncing back as vaccination rates increase and restrictions are eased.
Due to the recent economic developments, the bank announced an extension to the bond purchases at a weekly pace of $4 billion until at least February 2022. The decision reflects the delay in the economic recovery and the increased uncertainty associated with the Delta outbreak.
The board expects the economy to pursue its growth again in the December quarter and is expected to be back around its pre-Delta path in the second half of next year. And again, the statement stressed that the conditions for raising rates will not be met before 2024.
BoC Cautiously Stays on Hold
The Bank of Canada held its overnight interest rate at 0.25% in line with forecasts, and maintained its asset purchases at $2 billion per week, following a $1 billion cut in the previous meeting. The bank expects the economy to strengthen in the second half of 2021, after a 1% contraction in the June quarter. Although the fourth wave of COVID-19 infections and ongoing supply disruptions could weigh on the recovery.
The central bank sees the inflationary pressures as transitory, but their persistence and magnitude are uncertain and will be monitored closely.
The BoC judges that the recovery still requires extraordinary monetary support as the Canadian economy still has considerable excess capacity. While reiterating its commitment to hold the interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is achieved. In the Bank’s July projection, this happens in the second half of 2022.
BoJ Sticks to its Ultra-Loose Policy
The Bank of Japan left its key interest rate 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 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.
Worldwide Monetary Policies
The Central Bank of Turkey lowered its one-week repo rate by 100 bps to 18% during its September meeting, opposing market expectations, claiming that tight monetary policy had created a larger-than-expected contractionary effect on commercial loans. The bank stated its commitment to curb personal loan growth. Policymakers said that the increase in inflation was still transitory and driven by the rise in food and import prices, due to supply constraints and the expansion in demand following the reopening of the economy.
Meanwhile in Brazil, the central bank raised the Selic rate by 100 basis points to 6.25% on September 22nd, as expected. That was the fifth hike in interest rate in 2021 and policymakers expect a similar rate increase at the next meeting.
The People’s Bank of China left the benchmark interest rates for corporate and household loans on hold for a 17th straight month in September, as widely expected. The one-year loan prime rate (LPR) was kept unchanged at 3.85%, while the five-year remained steady at 4.65%.
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