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Will the ECB slow the pace of its bond buying?
A surge in inflation as the eurozone economy stages a rebound from the Covid pandemic has raised the possibility that the European Central Bank could begin to dial back its emergency stimulus efforts as soon as this week.
Investors have already begun to price in the possibility of a “tapering” of ECB asset purchases following a series of public comments by policymakers hinting such a move may be on the cards at Thursday’s meeting, which comes on the heels of the fastest rise in consumer prices in the bloc for more than a decade.
Silvia Ardagna, chief European economist at Barclays, said she expected the ECB to trim its monthly bond purchases under the pandemic emergency purchase programme (PEPP) to €60bn-€70bn a month, from the current rate of €80bn. Ardagna also expects the central bank to raise its growth and inflation projections.
Even so, the ECB will be keen to avoid sending a “hawkish” signal by taking such a step, Ardagna argues. Unlike the US Federal Reserve, which is expected to soon embark on a path to ceasing asset purchases altogether, investors think the ECB will continue to buy bonds under its pre-pandemic quantitative easing programme once the PEPP has been wound down.
“We think that the ECB president will indicate that conditions for a change to the broader monetary policy stance are not in sight yet . . . and that the change to the PEPP programme should not be interpreted as the beginning of tapering total asset purchases to zero, rather as an adjustment to the emergency measures due to a much improved growth and inflation outlook,” Ardagna said. Tommy Stubbington
How will Beige Book insights affect the Fed’s tapering tempo?
The Federal Reserve on Wednesday will publish its Beige Book, a qualitative report on the state of the US economy that will help inform the central bank’s decision around starting to cut back its $120bn monthly purchases of government debt.
The Beige Book compiles interviews conducted by each of the 12 local Fed banks of businesses in their region. Of particular interest to market participants and the Federal Open Market Committee will be insight into labour market trends and supply chain issues, which have been pushing inflation higher this year.
The Fed has said that “substantial further progress” towards an average 2 per cent inflation rate and maximum employment are the two thresholds the US must meet for the central bank to begin scaling back its support of the economy. At the Jackson Hole summit in August, Powell said the first of those conditions had been met. A drab employment report on Friday suggests the second is further away.
“The question becomes does this report provide the Fed enough conviction at their next meeting to announce tapering this year and more importantly keep their forecast of two rate hikes in 2023. We don’t think it will and expect a modest dovish step back at the September meeting,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.
While many investors typically depend more on national quantitative data to inform their outlooks and positioning, the Beige Book may take on more importance than usual this month.
“Usually I prefer hard data and eschew these anecdotes but given today’s circumstances . . . these anecdotes might be the best way of telling if the supply chain crunch is easing,” said Tom Graff, head of fixed income at Brown Advisory.
“The hard data needs context at least and at times can even be deceptive under these circumstances of unprecedented supply pressures, labour shortages and a rapidly changing pandemic,” he said. Kate Duguid
Will Australia’s central bank finally raise rates?
It has been 11 years since the Reserve Bank of Australia raised interest rates and few anticipate that stretch to be broken when the governors meet this week.
A skyrocketing housing market had led some analysts to ponder whether the RBA could raise interest rates from historic lows. However, the fresh round of lockdowns to stem the spread of Covid-19 makes this less likely. Neighbouring New Zealand delayed a widely expected interest rate rise in August due to a flare-up in Covid cases.
Shane Oliver, chief economist at AMP Capital, said the deteriorating economic outlook since the last RBA meeting would reinforce the stance that a rate rise is a long way off. “There is not much focus on rates at present as the RBA has been saying for some time that it won’t increase rates until ‘actual inflation is sustainably within the 2-3 per cent target range’. And that ‘the central scenario for the economy is that this condition will not be met before 2024’,” he said.
Yet there is a debate over whether the bank will deliver on its desire to start to taper bond buying by about a fifth. Su-Lin Ong, a managing director at RBC Capital Markets, said the RBA would have an “easy narrative” to modestly taper the pace of purchases to about A$4bn per week.
Others predicted the plan would be put on ice due to a deteriorating economic outlook. “We are very bearish about the Australian economy in the next several months and expect the bounce‑back to be weaker than it was in 2020,” said Kim Mundy, senior economist at Commonwealth Bank. Nic Fildes