As the global economy recovers on a broader scale, central banks are discussing withdrawing from the large-scale monetary policy stimulus during the pandemic, and their stance has gradually changed from dove to hawk. Among the current major central banks, those who have demonstrated hawkish stance include Federal Reserve, Bank of England, Bank of England, Reserve Bank of New Zealand and Bank of Canada. However, it has not officially started to raise interest rates yet. Instead, it will first reduce bond purchases until a more mature time. Among them, the pace of water withdrawal by the Federal Reserve has attracted the most attention.
Against the backdrop of gradual tapering, global liquidity has also begun to shrink. According to Bank of America data, the liquidity released by global central banks in 2020 was US$8.5 trillion, shrinking to US$2.1 trillion in 2021, and only 0.1 in 2022. Trillions of dollars. So how is the current tapering progress of major central banks? Which central bank might be the first to raise interest rates?
The Federal Reserve
is different from previous dovish statements. In the latest interest rate decision last week, the Fed's stance has turned slightly hawkish, revealing that it may begin to reduce the pace of monthly bond purchases as soon as November. It also hinted that as the Fed speeds up Reversing the large-scale loose monetary policy during the pandemic, and the latest dot plot shows that the interest rate hike after the end of bond purchases may be earlier than expected, starting as soon as next year, and interest rates should rise to at least 1% by the end of 2023.
After the resolution was announced, federal funds futures showed that the probability of the Federal Reserve raising interest rates in December 2022 was more than 80%. As can be seen from the jump in U.S. Treasury yields since last week, market portfolios are continuing to repricing expectations for interest rate hikes, and such expectations will continue to be adjusted as more U.S. economic indicators are released. Before the U.S. releases its September non-farm payrolls report next week, many Federal Reserve officials will give speeches this week and are expected to strengthen their hawkish stance.
European Central Bank
The European Central Bank announced in September that it would reduce the scale of emergency bond purchases (PEPP) in the next quarter, releasing an initial tightening signal. However, President Lagarde also said that a moderate slowdown in bond purchases is not a gradual start. Scale back its asset purchase program and instead recalibrate stimulus based on improving fundamentals.
PEPP is scheduled to end in March next year, and the next decision needs to be made before December this year. Based on the fact that inflation has risen to an unexpected high in ten years, the plan is not expected to be extended, and the asset purchase plan introduced before the epidemic ( APP)’s asset purchase scale remains at 20 billion euros per month to maintain the smooth operation of the market.
Although the European Central Bank cuts bond purchases faster than the overall market, starting first does not mean reaching the point of raising interest rates first. Especially for the European Central Bank, the economy needs QE to accompany it for longer than most peer countries. , so even though there is heated discussion about cutting bond purchases, the governor has never explicitly mentioned a plan to raise interest rates, and the market’s expected time for the fastest interest rate increase is still in 2023 or even later, so at present, there is still a long way to go before raising interest rates. A long time to go.
Bank of England
The change in the Bank of England's stance became further evident this month. First, Governor Bailey directly stated that "the minimum threshold for considering raising interest rates has been reached." Then in the latest resolution last week, more members joined in tightening policy. support camp. In his latest speech on Monday, Bailey once again said that he and other members of the Monetary Policy Committee believe that the reasons for raising interest rates are getting stronger and stronger, seeming to be paving the way for accelerating tightening of policy in the future.
As it approaches the end of its 895 billion pound asset purchase plan, the market has recently expected that the Bank of England may raise interest rates faster than other major central banks such as the Federal Reserve. The first interest rate increase may be as early as February next year, which is already higher than one Expectations from a month ago have moved forward significantly, and the more mainstream expectation is that interest rates will be raised to 0.25% from the current record low of 0.10% in the second half of 2022. If the Bank of England cuts its bond purchases before the end of the year and signals a plan to raise interest rates, the pound will still have the opportunity to seek further gains.
The biggest difference between the New Zealand Reserve Bank
and other central banks is that the New Zealand Reserve Bank is likely to be the fastest major central bank to start raising interest rates after the epidemic. The market is currently weighing the possibility of announcing an interest rate hike at its October meeting, and believes that it will raise interest rates for the first time. After raising interest rates, interest rates may rise again in November. According to Bloomberg interest rate futures, the probability of the Reserve Bank of New Zealand raising interest rates by 0.25% in October has risen to 100%.
Originally in August, the market had expected the Reserve Bank of New Zealand to raise interest rates. However, the sudden emergence of cases in New Zealand put the plan on hold. However, in the eyes of the outside world, the conditions for raising interest rates again have been met, especially in the second quarter. Quarterly economic growth far exceeded expectations strengthened this view, and the Reserve Bank of New Zealand may even make up for its previous decision to suspend interest rate hikes by continuously raising interest rates.
However, the upward reaction of the New Zealand dollar to this is not obvious yet. When the interest rate hike really comes as scheduled next month, and the New Zealand Reserve Bank looks at a faster pace of interest rate hikes with a hawkish stance, the New Zealand dollar can further gain policy leadership. The boost, especially against the Australian dollar, will extend.
Bank of Canada
Although the Bank of Canada stayed on hold in September, it remains optimistic about the economic outlook and is still actively planning to raise interest rates. The market expects that the next step will be to further reduce the size of its weekly bond purchases from the current C$2 billion. To 1 billion Canadian dollars, it may be carried out in October, and then start to raise interest rates next year, so it is among the major central banks that are in the upper-middle range of tightening pace.
Governor McCallum previously said that the Canadian economy is approaching the critical point where it no longer needs to continue to increase stimulus through quantitative easing. Once the purchase of 2 billion Canadian dollars of bonds is stopped, new bonds will still be purchased to fill the maturing bonds, but new funds will no longer be mobilized to buy bonds until before interest rates are raised. However, the Bank of Canada has not disclosed clear expectations for when it may raise interest rates. If the Federal Reserve takes action in November, it may also prompt the Bank of Canada to adopt a more active tightening attitude.
Reserve Bank of Australia
Although Australia’s economy is certain to fall into negative growth in the third quarter due to the impact of the epidemic, the Reserve Bank of Australia took a key step in the last meeting and unexpectedly stated that it would reduce its weekly bond purchases by A$1 billion. to A$4 billion, but pledged to maintain that pace for at least six months, a move described as a dovish cut.
More importantly, in terms of interest rate hikes, the Reserve Bank of Australia does not have radical expectations. Instead, it has been reiterating that it is unlikely to actually raise interest rates before 2024. Therefore, the market also believes that the Reserve Bank of Australia will lag behind in the pace of interest rate normalization. to other major central banks. The current market price is that interest rates in Australia may only reach 0.1% by the end of 2023. Although it is faster than the current Reserve Bank of Australia expectations, it is already significantly behind other central banks.
The Bank of Japan
Unlike other central banks that are already discussing reductions, the Bank of Japan will still maintain monetary policy unchanged for a long time. Amid the current lack of economic improvement and inflationary fatigue, the Bank of Japan at its policy meeting in September made a decision on exports and production. The outlook is even bleaker, and even market expectations do not rule out the need for more easing to support the economy.
Even against the background of soaring inflation in other economies, Japan’s core CPI did not stop falling for the first time in 13 months until August and became flat. Therefore, as before the epidemic, failure to meet inflation targets is still a long-standing problem for the Bank of Japan. , and the economy is far from recovering, so tightening policies is still far away.
Disclaimer: The above analysis is provided by Lin Mingtian, chief analyst of ATFX Asia Pacific. ATFX will not be responsible for any profits or losses that may arise directly or indirectly from the use of or reliance on this information.
