LONDON (Reuters) – The last big central bank meetings of 2021 are over and the lines are clear: policymakers angry enough with high inflation to start reversing the pandemic-era stimulus now and those who insist that an ultra-loose policy is always necessary.
The Bank of England on Thursday became the first major central bank to raise interest rates since the start of the COVID-19 pandemic. The US Federal Reserve has also taken a big step towards ending bond buying and preparing for rate hikes, while the European Central Bank remains on the slow lane.
Here’s a look at where policymakers are on the path to relaunching the pandemic era, in order of their hawkish appearance:
(Chart on, Central Bank Balance Sheets: https://fingfx.thomsonreuters.com/gfx/mkt/klvyknowjvg/theme1612.PNG)
1 / NORWAY
Norway’s central bank consolidated its position as the most aggressive rate fixer in the developed world, raising rates https://www.reuters.com/markets/europe/norway-hikes-interest-rates-with-more- come-2021- 12-16 for the second time this year on December 16 despite an expansion of COVID brakes that could hurt the economic outlook.
After starting to tighten policy in September, the bank raised rates by 25 basis points to 0.5% and slowed further next year, potentially raising the policy rate to 1.25% by the end. 2022.
(Chart on New Zealand and Norway leading with rate hikes among developed economies: https://fingfx.thomsonreuters.com/gfx/mkt/mopanqrdzva/CBANKS1712.PNG)
2 / NEW ZEALAND
New Zealand’s central bank hiked rates last month for the second time this year to 0.75% and forecast they would hit 2.5% by 2023.
Inflation soared and a hot real estate market fueled fears of an overheating economy.
Data this week showing economy shrinking a record 3.7% https://www.reuters.com/world/asia-pacific/new-zealand-gdp-shrinks-37-q3-due-delta -lockdowns-2021-12-15 in the third quarter hasn’t been as bad as expected and with COVID-19 restrictions set to ease, the numbers haven’t dampened rate hike expectations.
3 / BRITTANY
Bank of England shocked markets https://www.msn.com/en-ca/money/topstories/boe-becomes-first-major-central-bank-to-raise-rates-since-pandemic/ar -AARRc2R on Thursday with an 8-1 vote to hike rates, deciding to crush inflation now, rather than wait and see how the rapidly spreading Omicron variant of COVID-19 impacts the economy.
Explaining its 15 basis point hike to 0.25%, the BoE said inflation is expected to hit 6% in April – triple its target – and more rate hikes are likely to be needed.
Money markets, which had anticipated a first hike in February, now expect a further 25 basis point tightening by March and two more rate hikes before the end of 2022.
(Chart on BoE base rate since 1900: https://fingfx.thomsonreuters.com/gfx/mkt/jnpweaobmpw/BoE1712.PNG)
4 / UNITED STATES
The Federal Reserve took a major hawkish turn this week https://www.reuters.com/markets/us/fed-prepares-stiffen-inflation-response-post-transitory-world-2021-12-15.
On Wednesday, he pledged to end his pandemic bond purchases by March and presented an accelerated timeline for the rate hikes.
Fed Chairman Jerome Powell anticipates strong growth and full employment in 2022 and believes the central bank should view inflation as the most pressing risk.
It’s no surprise, then, that markets are pricing in a high probability of a rate hike in May, with a hike by June fully integrated.
(Chart on, Rising US inflation prompts Fed to act: https://fingfx.thomsonreuters.com/gfx/mkt/gdpzymgbovw/USCPI1712.PNG)
5 / CANADA
Comments from Bank of Canada Governor Tiff Macklem this week suggest that rates will start rising soon, given inflation to 18-year highs and the rapidly declining economic downturn.
Money markets are now almost fully integrating a 25 basis point rate hike in March. Canada’s central bank announced in October that it would end its bond buying program and advanced its rate hike projections.
6 / AUSTRALIA
The Australian central bank is in the conciliatory camp, but narrowly.
Last month, the Reserve Bank of Australia took an important step towards the unwinding of the pandemic stimulus by abandoning an ultra-low bond yield target and opening the door for a first rate hike in 2023, earlier than the previous forecast of 2024.
This week, Gov. Philip Lowe said he was ready to end bond buying as early as February, but still believed rates would be unlikely to rise in 2022 – putting the RBA at the back of the queue squeeze.
7 / SWEDEN
Sweden has ended lending facilities in the era of the pandemic, but says rates will only rise if inflationary pressures change significantly. The bank has forecast a rate hike at the end of 2024.
But this week’s data showed headline inflation at a 25-year high https://www.reuters.com/markets/europe/headline-inflation-sweden-hits-fastest-pace-since-1993-2021-12 -14, which one regulator said supported the argument for further stimulus reduction. Riksbank Governor Stefan Ingves https://www.reuters.com/markets/europe/swedish-cbank-chief-says-inflation-surge-due-energy-prices-2021-12-14 attributed the rise to prices electricity.
8 / EURO ZONE
The European Central Bank is on a very different path from most of its peers.
On Thursday, he announced that he would end his € 1.85 trillion emergency pandemic asset purchase program next March.
But he also pledged strong support through his long-running asset buying program and signaled that any exit from years of super-easy politics will be slow. The ECB says a rate hike next year is unlikely and expects inflation, to hit an all-time high of 4.9%, to fall.
(Graphic, Life after PEPP looms in the euro area: https://fingfx.thomsonreuters.com/gfx/mkt/byprjqabjpe/ECB1712.PNG)
9 / JAPAN
The Bank of Japan took interim measures to lift the pandemic-era stimulus measures on Friday, saying it would slow purchases of corporate bonds and commercial paper to pre-pandemic levels from April.
But the bank kept its short-term rate target at -0.1% and that of 10-year bonds around 0%. With inflation well below its 2% target, the BOJ will likely maintain super-easy policies much longer than its peers.
10 / SWITZERLAND
The Swiss National Bank has held firm this week, saying its monetary policy, combining the world’s lowest interest rates and frequent intervention in the foreign exchange market, remains appropriate.
While the recent rise in the Swiss franc to 6.5-year highs helped curb imported inflation, the SNB intervened sporadically to contain the franc’s gains. It recently launched its biggest weekly intervention since mid-May.
(CHF intervention graph: https://fingfx.thomsonreuters.com/gfx/mkt/zjpqkyogbpx/CHF%20intervention.JPG)
(Reporting by Tommy Wilkes, Saikat Chatterjee, Sujata Rao and Dhara Ranasinghe; editing by Catherine Evans)