As the world turns... Much of Europe is in the midst of easing restrictions, with late June targeted for full reopenings. Not so in Asia, as the virus has flared up again, prompting the rollout of new measures. In general, as we approach mid-2021, there are cases to be made for central banks to start paring their bond purchases; or at least, to start thinking openly about doing so. However, aside from the Norges Bank and the Reserve Bank of New Zealand, most policymakers are keeping quiet. But higher inflation readings may have a say.
Take the ECB. Its next meeting on June 10 is key as it will give a "thorough assessment" of financing conditions and the inflation outlook, and decide on the pace of asset purchases under the PEPP, which was stepped up in March. The plan was to review the "significantly higher" pace on a quarterly basis. That brings us to June, when the Governing Council will have updated economic forecasts in hand and an early glimpse of activity as restrictions are slowly lifted. We expect upgraded forecasts for growth and inflation and they, along with a faster rate of vaccinations, present a clear case to slow the bond buys moderately, at least from the PEPP. In fact, slower purchases in the emergency program can be offset by raising the monthly purchases from the APP.
However, any changes to policy are highly unlikely as all ECB officials have relayed the same message over the past month: it is too early to map out an exit, too early to slow things down, and that continued policy support is still needed. And, President Lagarde proclaimed in early June that "strong policy support" will be there "well into the economic recovery." She may even borrow some wording from the Fed... emphasize that yes, things have improved, but they are not there yet, and it will take time before substantial further progress is seen. The ECB head may also borrow an adjective from the IMF and the OECD and call the recovery "uneven". Don't be surprised if the can is kicked to September. By then, most of Europe will be vaccinated and the Recovery Fund will be in circulation. Only then will the ECB take a step back.
Then there is the BoE. Its next meeting is on June 24, which is Andy Haldane's final meeting at the Bank. Governor Bailey will start by thanking him for his 32 years of service, with the last seven as Chief Economist. The MPC will, perhaps, poke fun at him for being outnumbered as the sole hawk on the Committee before wishing him well at his new role as Chief Executive of the Royal Society for Arts, Manufactures and Commerce. He will chuckle, then, as a parting shot, fire back with another vote to reduce the scale of asset purchases from £150 bln to £100 bln. Oh, the memories they will share.
Recall at the May meeting, the BoE did not change its target of £150 bln of government bond purchases, to be completed around the end of 2021. It did, however, slow the buying pace in order to meet that target (amount and timeframe) but cautioned markets not to interpret it as a change in monetary policy. This month, no changes are expected. But, if PM Johnson is able to reopen the economy completely, ending social distancing by June 21, the rate of economic growth could pick up meaningfully, putting pressure on the central bank to at least begin to consider raising rates. Still, as Gertjan Vlieghe put it, stronger growth should only be viewed as a return to normal, not a boom. Nonetheless, the normally dovish policymaker mused that if growth was faster than projected, then the first rate hike could become appropriate "well into next year", or 2022.
Finally, there are two central banks in particular which have no plans to raise rates in the next few years: that choice is obvious for one, not so obvious for the other. The Bank of Japan is the former, as its economic recovery is still on a weak footing and is at risk of sliding back into recession after the current state of emergency was extended by another three weeks, or until June 20, a month before the Summer Olympics begin. The RBA is the other, with Governor Lowe repeating that rate hikes are "unlikely to be until 2024, at the earliest". It is difficult to accept, as the economy powered ahead to pre-pandemic levels in Q1, and is getting an extra boost from surging commodity prices. However, concerns about the slow pace of vaccinations, the latest outbreak in Melbourne, along with low inflation and sluggish wage growth, are keeping the central bank ultra-cautious.