May 07, 2021 | 13:41
In Case of Emergency, Break Glass
t’s not easy being a central banker these days, weighing the dangers of removing stimulus too quickly against stronger economic data. There is pressure that you should, at the very least, start talking about, talking about, taking back some accommodation —even if you don’t expect it for months—to prepare markets for the inevitable. Most policymakers seem to be digging in their heels, at least for now.
There are a few exceptions. Brazil raised rates in May, again, by another 75 bps and told markets to expect another one at the next meeting as inflation remains far too high. The Norges Bank also sent a clear signal for the second meeting in a row… a rate hike is likely on the way in the second half of this year. The Bank of Canada laid the groundwork for a rate hike, though it won't be for another year or two.
The majority remain exceedingly patient, especially the BoJ, with its view that inflation likely won’t even come close to 2% during Governor Kuroda’s time at the Bank. His term ends in April 2023. The RBA says Australia’s economy returned to pre-pandemic levels back in March; yet, the labour market is not strong enough to produce inflation, which is far from the 2%-to-3% target. So, Governor Lowe sounds like a broken record saying that rate hikes are not happening until sometime in 2024, “at the earliest”. Then there is the ECB. At the April meeting, President Lagarde gave a stay-the-course message, that the assessment had not changed, and it was “premature to discuss tapering”. Well, that is debatable but in the two weeks since, things are looking better and the pace of vaccinations is picking up, which is essential. The manufacturing PMI is expanding at its fastest pace since the series began. The services PMI is slower to come back but it is growing at its fastest since August. Expect a bigger rebound as restrictions and lockdowns are lifted gradually.
Finally, the BoE sent some mixed messages at its latest meeting. It left policy unchanged but raised the 2021 GDP outlook to 7.25% (fastest since the ‘40s) and decided to slow its pace of weekly bond purchases. But, the MPC was quick to warn anyone not to read too much into the decision, as it was “operational” and should not be viewed as a change in its stance. Indeed, at the current pace, it would hit the £895 bln limit well before year-end, so to make it last, the buying had to slow.
Bottom Line: As economies reopen safely, and as a bigger share of adults become immunized, emergency measures should be pared. These tools should only be used in case of emergencies; or, they lose their effectiveness. The time is coming when central banks should start to call it a day.