Central Bank watch

[KDave]

Central banks are starting to tighten

"Iceland’s central bank raised interest rates this month. If we put aside the pandemic and the post-2008 general fear of tighter monetary policy, and just look at the economic data, it’s very obvious why it did so. Inflation in Iceland is sitting at 4.6%; the bank targets 2.5%.

Wages and house prices are rising, half of the adult population has had at least one jab, and the economy is set to grow by 3% this year and 5% the next. Given all that, you can see how even the newly-raised interest rate of 1% might not seem overly restrictive.

Of course, Iceland isn’t the only economy which seems to be running hotter than its key interest rate would suggest.

In fact, there are a great many such economies, and lots of them are now starting to think about tightening up. So far this week, the central banks in New Zealand and South Korea have both called time on emergency monetary policy.

The Bank of Canada did the same last month by scaling back its quantitative easing, and earlier this month, Norway confirmed it expects to raise rates later this year.

Our own Bank of England is also forecasting a much stronger economic recovery than it had previously expected, which in turn suggests earlier tightening, although the Bank has also been at pains to emphasise how conditional this all is.

Similarly, the bigger central banks are being much more cagey about how they discuss interest rate changes. The Federal Reserve, America’s central bank, has been very keen to emphasise its patience and the importance of employment data, partly because it is worried about a re-run of the 2013 “taper tantrum”.

The European Central Bank (ECB) meanwhile has been similarly keen to talk down prospects of higher rates or fewer bond purchases. This makes particular sense in the case of the ECB, as it’s always much harder to get the machinery rolling one way or the other when you have such a diverse group of nations jockeying for attention.

However, even in the absence of a clear desire to start increasing interest rates, investors now expect both the Federal Reserve and the Bank of England to raise rates a lot earlier than they did just a few months ago, notes Bloomberg.

In fact, markets had expected the Bank of England to be cutting rates in late 2022, whereas now they’re expecting a rate hike. They also don’t see the ECB cutting rates any further. China’s central bank, meanwhile, is indicating that it doesn’t mind the fact that the yuan is sitting at its strongest level against the dollar for years.

There are many factors behind that, but it at least partly suggests that the authorities are more concerned about inflation than they are about growth. In short, monetary policy – in terms of expectations – is already getting tighter."

[KDave]

The above is from a Moneyweek article, they are onto the inflation narrative. 

This thread is to record and discuss central bank activity over the next few months regarding interest rates, whether they raise or lower, QE or tighten.