Inflation Menace Vs Pandemic Recovery: Central Bank Guide

The pandemic remains a risk to demand the world over, but after triggering a recession in 2020, its subsequent igniting of price pressures has also posed a challenge for monetary policy makers.

They enter a new year having to tread carefully. Acting quickly to control prices could end up quashing expansions, especially if inflation fades anyway.

Waiting longer to secure recoveries might mean inflation festers, requiring stronger action later.

Increasingly rattled by the outlook, the Federal Reserve is set to hike interest rates for the first time since 2018, although its peers in Canada and the U.K. may shift even sooner. 

Thirteen counterparts tracked here are also seen tightening, including most of the emerging market institutions that led the charge with rate hikes in 2021.

By contrast, the European Central Bank and Bank of Japan could end the year where they started, with rates at rock-bottom levels as they try to safeguard growth.

As for China, it’s seen cutting its benchmark as officials try to cushion a slowdown in the world’s No. 2 economy.

What Bloomberg Economics Says:
“In 2022, the great decoupling that has already hit trade, finance and technology will come to central banking — with the Fed rushing into a tightening cycle even as the People’s Bank of China starts to add stimulus. A world divided into separate spheres of monetary influence — with Asian central banks dragged into the orbit of the PBOC — will be an important new dynamic for markets to navigate.” –Tom Orlik, chief economist

Here is Bloomberg’s quarterly guide to 23 of the world’s top central banks, covering 90% of the world economy:

U.S. Federal Reserve: Current federal funds rate (upper bound): 0.25%, Bloomberg Economics forecast for end of 2022: 1%, Bloomberg Economics forecast for end of 2023: 2%. 
Fed Chair Jerome Powell and his colleagues could raise rates as soon as March as they confront the hottest inflation in nearly 40 years, although omicron may be grounds for delay. The U.S. central bank accelerated its removal of policy support to end bond buying by mid March and Governor Chris Waller said Dec. 17 that their policy meeting that month was definitely “live” for liftoff, depending on the fallout of the new Covid-19 variant on the economy. Officials penciled in three quarter-point rate increases this year in their latest forecasts, with inflation declining and the jobless rate falling to around 3.5% by the end of 2022.
“The question that remains is when liftoff will begin. We expect a first rate hike in 1H 22, and depending on the growth disruption of omicron, that could occur as early as the March meeting. Biden’s potential nominees for filling the three open seats at the Fed board will unlikely change the rates outlook for 2022, though would likely tilt policies dovish in 2023.” Anna Wong, Bloomberg Economics.

European Central Bank: Current deposit rate: -0.5%, Bloomberg Economics forecast for end of 2022: -0.5%, Bloomberg Economics forecast for end of 2023: -0.5%. The ECB will start unwinding its pandemic policy measures in 2022, with net bond-buying under its emergency program to slow in January before ending in March. There’ll be a temporary boost to regular asset purchases and flexibility in reinvesting maturing debt to try to reassure investors that financing conditions won’t tighten too soon. Inflation in the 19-nation euro area is expected to fall back below the 2% goal in 2023 and stay there in 2024 despite strong economic growth, though some Governing Council members have started to warn against ignoring upside risks. President Christine Lagarde has said rate increases are still “very unlikely” this year — but also that she’s prepared to change her mind should consumer prices rise more quickly than expected.
“The ECB is caught between a price shock and a slowing recovery. However, the slack in the labor market will limit underlying price pressures and cause the current bout of high inflation to be transitory. That should allow the Governing Council to continue buying bonds until 3Q23.” David Powell, Bloomberg Economics.

Bank of Japan: Current policy-rate balance: -0.1%, Bloomberg Economics forecast for end of 2022: -0.1%,Bloomberg Economics forecast for end of 2023: 0%.
Governor Haruhiko Kuroda enters his last full year at the helm insisting that the BOJis nowhere near normalizing policy. The BOJ will reduce corporate debt purchases at the end of March as it takes gradual steps to pare back pandemic support. But stimulus will stay in place even as the rest of the world frets about reining in accelerating prices, Kuroda has indicated. 
Still, the outlook in Japan is not crystal clear. While the country’s key inflation gauge remains barely above zero as firms continue to absorb higher costs, the price index could jump in the spring once the impact of sharply lower phone fees drops out of calculations. That could give Prime Minister Fumio Kishida food for thought as he considers new candidates for the BOJ policy board.
“The BOJ has tried in vain for years to stoke inflation in Japan — it’s probably wishing some of the consumer price pressures that are vexing other central banks would show up a little in Japan. We don’t see that happening soon, at least in any substantial way. We expect the BOJ to stay on cruise control through 2022, while gradually shifting its focus from pandemic-related support to back to generating 2% inflation, complementing is existing tools with the new green lending program.” –Yuki Masujima, Bloomberg Economics.

Bank of England: Current bank rate: 0.25%, Bloomberg Economics forecast for end of 2022: 0.75%, Bloomberg Economics forecast for end of 2023: 1%. 
Britain is the biggest economy yet to shift toward controlling inflation and away from stimulating growth, and 2022 looks set to be an unusually exciting year both for policy makers and investors. Traders are betting the BOE will deliver the sharpest series of rate increases in three decades and also that those moves will constitute a painful policy mistake.
Officials led by Governor Andrew Baileyare spearheading a sharp response to inflation, which they forecast will top 6%, triple the BOE’s target. Investors anticipate another rate rise to 0.5% in February, a threshold where officials could then allow government bonds maturing in their 875-billion pound ($1.2 trillion) asset-purchase program to roll out of the portfolio.  The market sees the base rate reaching 1% by November, which is where the BOE has indicated it would consider selling gilts to tighten policy. That jars with an outlook for slower growth and increased trade friction following Britain’s exit from the European Union. The one certainty: Some investors have got it wrong. 
“The BOE faces a delicate balance in 2022. Inflation is set to head higher, squeezing real incomes and acting as a brake on growth. At the same time, the central bank is worried that soaring prices and a tight labor market could interact to lift inflation expectations. Our base case is that price stability remains the BOE’s primary focus with the policy rate ending the year at 0.75%.” –Dan Hanson, Bloomberg Economics.

Bank of Canada: Current overnight lending rate: 0.25%, Bloomberg Economics forecast for end of 2022: 1, Bloomberg Economics forecast for end of 2023: 2%. 
Investors are betting the Bank of Canadawill begin a hiking cycle in the first quarter of 2022 that will be one of the most aggressive among advanced economies. Markets are pricing in five increases, taking the benchmark rate to 1.5%. Policy makers will be racing to withdraw stimulus in an economy where employment has already blown past pre-pandemic levels and higher commodity prices have stoked income gains. Another concern: low borrowing costs have created a housing affordability crisis, with home values up a record 25% over the past year.
“The BoC’s renewed framework puts more focus on employment conditions than in the past. The added emphasis does not mean near-5% inflation will be tolerated for long. Our baseline is for a measured start to tightening, beginning in April. We see three 25 bps hikes in 2022 — less than markets expect — but a higher endpoint in 2023, at 2%.” –Andrew Husby, Bloomberg Economics

South African Reserve Bank: Current repo average rate: 3.75%, Bloomberg Economics forecast for end of 2022: 4.75%, Bloomberg Economics forecast for end of 2023: 5.75%.

South Africa could pause its rate-hiking cycle as risks to economic growth posed by a fourth wave of coronavirus infections temporarily outweigh inflation concerns. Economists predict international travel bans, imposed on South Africa after its discovery of the omicron variant, risk stalling the country’s economic recovery. That could force officials to rethink the pace of future policy. When the central bank raised its benchmark in November, the implied path of its quarterly projection model indicated one 25-basis point rate hike in each of the next 12 quarters. Governor Lesetja Kganyagohas long maintained that that’s a broad policy guide and that future decisions will be data dependent.
“Our base case sees the SARB going forward with its planned rate hikes. Policy makers could decide to pause the rate hiking cycle at their January 2022 meeting on omicron growth worries, but the bigger risk in our view is more aggressive rate hikes. This reflects expectations of higher U.S. rates, upside inflation risks and market concerns that the SARB is falling behind the emerging curve.” –Boingotlo Gasealahwe, Bloomberg Economics.

Central Bank of Nigeria: Current central bank rate: 11.5%, Bloomberg Economics forecast for end of 2022: 13.5%, Bloomberg Economics forecast for end of 2023: 13.5%.
Nigeria will likely keep its key rate on hold in the first quarter to bolster the recovery of an economy hard hit by the coronavirus pandemic and the collapse in the price of oil, its main export, in 2020. Slowing inflation should support leaving policy unchanged. Governor Godwin Emefiele signaled last month that the monetary policy committee’s existing stance should “continue for a little longer” to stabilize prices and buttress economic growth. Nigeria’s economic recovery is expected to gather pace in 2022, especially in the second half, when current OPEC quotas expire. The faster expansion, combined with the need to attract capital flows as developed markets starting tightening policy, is likely to lead officials to start hiking later in the year.
“Nigeria’s inflation remains above target, but the central bank has made it clear it wants to see a solid recovery before it raises rates. We don’t see this condition being met until the second half of next year. The recovery remains fragile, with a slow vaccination rollout program and oil supply disruptions posing downside risks to growth.” –Boingotlo Gasealahwe, Economics.

Source: Bloomberg Businesss News