The world’s main central banks choose different paths to exit stimulus

The United Kingdom became this Thursday (16) the first G7 economy to raise interest rates since the start of the pandemic, with the US central bank also signaling plans for monetary tightening in 2022, while the European Central Bank (ECB) only slightly restricted the stimulus.

The different paths taken by these leading central banks underscore deep uncertainties about how the fast-spreading omicron variant of the coronavirus will reach the global economy and their divergent views on persistently high inflation and obstacles in international supply chains.

They also reflect the uneven impact of the pandemic on the world’s major economies. Federal Reserve Chairman Jerome Powell predicted on Wednesday that the United States is moving towards full employment, come what may – long prospect for most labor markets Europeans.

Bank of England (BoE) authorities on Thursday increased the reference rate from 0.1% to 0.25%, confounding economists’ expectations that it would be on hold. The BoE said inflation should reach 6% in April, three times the target.

“The Committee continues to believe that there are bilateral risks around the medium-term inflation outlook, but that some modest tightening of monetary policy over the projection period is likely to be necessary to meet the 2% inflation target in a sustainable way.” said the British monetary authority, which also cut its growth forecasts for December and the first quarter of 2022 due to the spread of omicron.

The ECB, which has seen inflation fall below target for most of the past decade, has, in turn, held on to interest rates and announced that it will end in March its emergency asset-buying program adopted during the pandemic.

But the eurozone’s central bank has pledged continued support as needed through its long-running Asset Purchase Program (APP), confirmed its relaxed view on inflation and signaled any exit from years of ultra-accommodating monetary policy will be slow.

The institution’s president, Christine Lagarde, said the ECB was unlikely to enter interest rates next year, although she did not rule out the possibility.

“The spread of new variants of the coronavirus is creating uncertainty,” he said, citing impacts on companies in the hosting industry and elsewhere if new restrictions on activity are needed. Lagarde added that the global supply chain hurdles that emerged from rising demand after the 2020 lockdowns were already limiting recovery. “These bottlenecks will remain with us for some time, but they should diminish in 2022,” he said.

With the eurozone economy now back to pre-pandemic size, pressure is increasing on the bank to follow its global peers and turn off the cash taps. But officials are concerned that an accelerated stimulus rollback could undo years of efforts to rekindle previously anemic inflation.

The ECB will double purchases to €40 billion (BRL 257 billion) under the APP in the second quarter of 2022, before slowing them to €30 billion (BRL 192.8 billion) in the third quarter. Starting in October, purchases will be held at €20bn (£128.5bn) for “the time needed” to bolster the accommodative impact of its interest rates, the bank said.

“The Governing Council assesses that progress in the economic recovery and towards its medium-term inflation target allows for a step-by-step reduction in the pace of its asset purchases in the coming quarters,” the agency said in a statement.

On Wednesday (15), the Fed said it would end the bond purchase program under way since the beginning of the health crisis in March, paving the way for three increases of 0.25 percentage point each in interest rates by the end of 2022, in order to end the policies implemented in the period.

Powell, the head of the US monetary authority, said that omicron increases uncertainty about the course of the economy and that it is not clear what its effect will be on inflation, growth or hiring. But he said that people are “learning to live” with each wave of the virus.
“The economy no longer needs increasing amounts of monetary policy support,” he said. “In my opinion, we are making rapid progress towards full employment.”

The Bank of Japan (BoJ, its acronym in English) is expected to announce its monetary policy decision this Friday (17). With consumer inflation remaining virtually nil, only a slight reduction in corporate asset purchases is under discussion at the meeting.

Norway’s central bank, which had raised interest rates in September in the wake of an economic recovery, took more steps in that direction with another interest rate hike this Thursday (15), as expected, and said there was likely more.

Also on Thursday, the Swiss National Bank maintained its ultra flexible stance with a negative benchmark interest rate set at -0.75%. Swiss inflation – though up by local standards – is still likely to be much lower than elsewhere, at just 1% next year and 0.6% in 2023.

In Brazil, the Central Bank’s Monetary Policy Committee raised, at its last meeting, the Selic interest rate to 9.25% per year and indicated a new increase of 1.5 percentage points in February, to 10.75%. On Tuesday (14), BC also indicated that Selic should be above the market’s expectations until 2023.

Before the Copom meeting, economists had expected the interest rate to advance to 11.75% throughout 2022 before starting a downward cycle, with 11.25% until December and 8% at the end of 2023, according to the Focus survey. . This was the scenario used in the BC simulation.

With this, the monetary authority indicates that interest rates should be above 11.75% next year and 8% at the end of 2023.