- The Fed is venturing into a new phase
- ECB sounding less sure of its transitory view on inflation
- A ‘less now, more later’ approach by the PBoC
It seems as though some central banks are no longer taking it slowly when it comes to exiting their loose monetary policies. We have seen the first tightening moves by Norges Bank, the RBNZ and various emerging market central banks as they are generally satisfied with the economic recovery on the one hand, but also fear that high inflation might prove less transitory. This concern is fueled by higher incoming inflation prints, strong labor market data, lingering supply-chain constraints and rising commodity prices. Recently, the BoE and BoC unexpectedly joined this bandwagon by signaling that policy tightening might be imminent.
Since our last Central Bank Watcher, this change in central bank thinking has led to large moves in global rates markets. There have been strong rises in front-end and intermediate bond yields, while long-end maturities rally as earlier-than-expected policy tightening dampens growth prospects and implies less tightening further out. The beacons of stability here are the PBoC and BoJ, who both have kept their easing bias. The ECB, meanwhile, sounds less sure of its transitory view on inflation, but is still expected to avoid a QE cliff effect once its emergency QE program, PEPP, is phased out by spring next year. Finally, the Fed has been credibly holding firm on its tapering plan but we do not rule out more governors starting to lose their nerves on inflation.