Monetary Divergence Market News

Weekly Market Recap: The Pandemic Situation boosts Monetary Divergence

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As market volatility continues, investors are looking for the currencies where central banks are raising interest rates. 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 Reserve Bank of Australia was the first bank to indicate 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. 

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 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.

ECB Tapers Bond Buying under PEPP 

Monetary Divergence Market News

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%. 

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