Ultra-Low Interest Rates Here to Stay: 2021 Central Bank Guide

LAGOS (Capital Markets in Africa) — Central banks are set to spend 2021 maintaining their ultra-easy monetary policies even with the global economy expected to accelerate away from last year’s coronavirus-inflicted recession. In Bloomberg’s quarterly review of monetary policy that covers 90% of the world economy, no major western central bank is expected to hike interest rates this year. China, India, Russia, and Mexico are among those predicted to cut their benchmarks even further. Only Argentina and Nigeria are forecast to raise rates.

The assumption is central bankers will want to guarantee the recovery is safe before they even start to consider tightening policy. Continued uncertainty over the path of the virus along with elevated unemployment and weak inflation are the main reasons for waiting. And even if inflation makes a comeback this year, central banks will likely try to look through it.
What Bloomberg Economics Says: “In the Great Financial Crisis, central banks were the only show in town. In the Covid-19 recession, they are warm-up acts for ministries of finance delivering massive fiscal stimulus and healthcare systems delivering the vaccine. Looking forward, the main challenge will be exiting extreme stimulus without disrupting financial stability.”

U.S. Federal Reserve: The Federal Reserve enters 2021 with the pedal to the metal on monetary policy to help the U.S. economy recover from the coronavirus pandemic — and is in no hurry to take its foot off the gas. Even as Chair Jerome Powell says he can see the “light at the end of the tunnel” thanks to vaccines that should be broadly available by mid-year, he stressed there would be no hasty withdrawal of support. Officials have signaled they’ll hold interest rates near zero through at least 2023, and promised to keep buying bonds at a monthly pace of at least $120 billion until “substantial further progress” had been made toward the targets for maximum employment and 2% inflation. “We are committed to using our full range of tools to support the U.S. economy to achieve our goals,” Powell said in December after the Fed strengthened its bond-buying guidance. “We will continue to use our tools to support the economy for as long as it takes until the job is well and truly done. No one should doubt that.”
What Bloomberg Economics Says: “The Fed’s efforts to adopt more qualitative guidance on interest rate policy and, more recently, asset purchases should not be construed as evidence policymakers are moving toward reducing accommodation. Rather this is a dovish-minded endeavor intended to avoid a repeat of the 2013 taper tantrum. The economy is poised for a robust recovery in 2021, particularly in the latter half, but Bloomberg Economics does not expect quantitative easing to be scaled back until 2022, leaving interest rate liftoff closer to 2025.”

European Central Banks: The ECB increased its emergency bond-buying program to 1.85 trillion euros ($2.3 trillion) in December and extended it through March 2022. The 500 billion-euro boost won broad backing in the Governing Council only because President Christine Lagarde conceded that not all of that amount necessarily needed to be spent. Whether policymakers will get away with fewer purchases will depend chiefly on the evolution of the pandemic. While the start of vaccinations brightens the economic outlook, surging infections and a hard lockdown in Germany, the region’s largest economy, are weighing on short-term prospects. Economists and investors are also looking out for signals on the outcome of the ECB’s ongoing strategic review. Policymakers are discussing a change to the central bank’s inflation goal and how to incorporate climate risks, with results expected after the summer break.
What Bloomberg Economics Says: “The ECB’s primary tool for fighting the economic devastation reaped by Covid-19 is the Pandemic Emergency Purchase Programme. Its firepower now stands at 1.85 trillion euros. We expect buying through it to continue until the end of 2021 at a speed of about 20 billion euros per month. In addition, the Governing Council will continue to provide liquidity through its targeted longer-term refinancing operations at an interest rate that could be as low as -1%.”

The Bank of Japan is expected to keep its main rates unchanged during the year after fine-tuning its stimulus in 2020. The central bank has called for a review as it seeks ways to reduce the side effects and improve the effectiveness of its yield curve control policy. The need to make the framework more sustainable over the long run reflects the lengthening time span for achieving its inflation goal as prices fell at the fastest pace in a decade toward the end of 2019. The trajectory of the pandemic remains the biggest uncertainty. But presuming widespread vaccination in the first part of the year and the Olympic Games go ahead, BOJ watchers will be closely watching to see if the central bank will be able to wind down its Covid-19 support measures around September.
What Bloomberg Economics Says: “The BOJ needs to maintain its policy support for the corporate sector to keep risks to the economy in check. This raises the prospect that it will also extend the temporary boosts in ceilings on its purchases of ETFs and REITs beyond the March 2021 expiry. The decision to do that will probably come at its next policy board meeting in January. The policy review in March may adjust the flexibility and quality of ETF purchases.”

Bank of England: Bank of England Governor Andrew Bailey insists the BOE has plenty in its armory, including interest-rate cuts and the ability to accelerate or increase the institution’s bond-buying program. He may become the first-ever BOE governor to take rates below zero. Much depends on how the U.K. economy, already ravaged by the coronavirus, copes with life outside the European Union after the Brexit transition period ended on Dec. 31. Bailey also moves into the second year of his governorship with a cloud over his head, after being heavily criticized over a scandal during his previous role as head of the U.K.’s financial watchdog. He publicly apologized in December for the failure to fix the problems at the regulator early enough.
What Bloomberg Economics Says: “The BOE has sounded cautiously optimistic about the outlook. Our base case is that the central bank stays on hold, though that doesn’t mean it will be a dull year for BOE watchers. The central bank is likely to bring negative rates formally into its toolkit by reducing its estimate of a lower bound. That will give the QE planned for 2021 more bang for its buck.”

Bank of Canada: The Bank of Canada won’t raise its overnight policy interest rate this year even if the nation’s economy recovers. Governor Tiff Macklem has pledged to keep it at the current 0.25% level until excess capacity is fully absorbed, something the central bank last projected won’t happen until 2023. It will update its forecasts later this month.
What will be in play in 2021 is the mountain of government debt the central bank has been buying. It’s expected to start scaling back purchases as the first step in stimulus withdrawal.
The program was one of the most aggressive anywhere in 2020, and there are worries the Bank of Canada will start distorting the bond market at the current pace of purchases. Officials appear keen to put it in check. For the same reason, don’t expect the Ottawa-based central bank to top up bond purchases as the first line of defense if things unexpectedly deteriorate. If more stimulus is needed, Macklem will first look to other tools — like further cuts in the policy rate or a yield curve control framework.
What Bloomberg Economics Says: “The Bank of Canada will monitor financial conditions as the economy enters a rougher stretch this winter. Yet unless activity restrictions drive a market shock or vaccine rollout disappoints, the BoC is more likely to calibrate asset purchases lower around mid-2021, versus add stimulus. If substantial fiscal aid lifts growth by more than expected into the summer, the BoC could mull a change to forward guidance on a rate hold — currently ‘into 2023’ — late in the year.”

People’s Bank of China: The PBOC cut the rates at which it lends to banks to historic lows in response to the pandemic, with one-year loan rates reduced from 3.25% to 2.95%. It also used quantitative tools, such as lowering the amount of money banks have to keep in reserve and providing 1.8 trillion yuan of “re-lending” funds for banks to pass on to small and medium-sized businesses. Yet the pace of expansion in the PBOC balance sheet was modest compared to other major central banks. That was large because, as the regulator of a state-dominated banking system, it could order banks to increase loans and sacrifice profits in order to lower corporate financing costs. As a result, China’s credit growth soared as well as its debt-to-GDP ratio.
China probably was the only major economy to grow in 2020 and the central bank has indicated it wants to bring credit expansion in line with nominal economic growth in 2021. That would mean a moderation in the pace of new credit compared with 2020, possibly by injecting less cash into the financial system.
What Bloomberg Economics Says: “China’s growth looks set to rebound sharply in early 2021 before a slowdown in 2H toward the long-term trajectory. The PBOC is set to start tapering stimulus as it sets about normalizing policy. Its focus is likely to be on delivering targeted liquidity — using targeted required reserve ratio cuts, targeted medium-term lending facilities, and central bank re-lending. A 10 bp cut in the one-year Loan Prime Rate to cushion the 2H slowdown is possible.”

Reserve Bank of India: Governor Shaktikanta Das has assured investors monetary policy will stay accommodative through much of 2021, but that will be easier said than done.
India’s central bank faces a deluge of foreign inflows, sticky inflation and uneven growth prospects. The RBI, which cut interest rates by 115 basis points in 2020 to support an economy going through its worst downturn, has been on pause for the past three meetings as growth in consumer prices stayed well above its 2%-6% target range.
The biggest challenge will be checking a glut of liquidity that threatens a spike in inflation as demand for goods and services revive. A host of unconventional remedies include setting up a new facility to absorb surplus liquidity, raising banks’ cash reserve ratios and holding reverse repo auctions at higher rates. It will need to walk a fine line, as those moves also risk spooking debt markets and eroding demand for sovereign bonds, something the central bank would want to avoid since its the investment manager to the government.
What Bloomberg Economics Says: “We expect inflation to recede below the Reserve Bank of India’s 6% upper tolerance level in December to allow an extremely dovish monetary policy committee to resume easing in 2021. We expect the RBI to lower the repo rate by 25 bps to 3.75% at the February review and to 3% by August 2021. With liquidity a bigger inflationary threat, we expect RBI’s accommodative stance to switch to slashing borrowing costs this year.”

Central Bank of Brazil: Brazil’s central bank has indicated it may soon give up on its pledge to keep interest rates unchanged for the foreseeable future as inflation expectations rise toward the 2021 and 2022 targets. The benchmark Selic has stood at an all-time low 2% since August when the bank introduced its forward guidance and conditioned it to measures to keep public spending in check after a record budget deficit in 2020. While policymakers have stressed that the removal of the guidance won’t automatically translate into rate hikes, economists surveyed by the central bank forecast borrowing costs will start rising in August to end the year at 3%.
What Bloomberg Economics Says: “To a large extent, BCB’s next steps are tied to decisions on the fiscal policy. If markets perceive that President Bolsonaro is committed to fiscal responsibility, the real — which appears undervalued — could strengthen and help reverse some of the recent inflationary pressures. This could allow the BCB to hold rates through year-end, as in our base-case scenario. If instead, he insists on popularity-boosting measures the country cannot afford, the rise in fiscal risk could force the BCB not only to start a premature monetary normalization but perhaps even a rate shock.”

Bank of Russia: Russia’s central bank paused its easing cycle in September after a plunge in the ruble contributed to a surprise inflation uptick. By December, Governor Elvira Nabiullina was warning that continued price rises could limit the outlook for any further monetary easing. Inflation has become a political issue after incomes slumped in 2020 and President Vladimir Putin has ordered the government to take urgent measures to reduce prices of key staples. Nabiullina says she doesn’t think they’ll have much impact. Meanwhile, reports of Russia’s involvement in a U.S. hacking scandal could increase sanctions risk, further weakening the ruble. Russia’s inflation rate climbed above the central bank’s 4% target in November and may be near 5% by the end of the year, according to Nabiullina.
What Bloomberg Economics Says: “The Bank of Russia is firmly on hold, in the face of a spike in inflation that may not be as temporary as it seems. Policymakers will need at least a few months of data before they can regain confidence in the outlook. Ultimately weak demand is likely to take over as the main driver of price pressure. Another round of easing is more likely than premature tightening in 2021.”

South African Reserve Bank: South Africa’s monetary policy committee halted its cutting cycle after easing by 275 basis points since March, when the country’s first virus case was confirmed. Its projection model now indicates two increases of 25 basis points each in the second half of 2021. However, the MPC continues to emphasize future decisions will be data-dependent. That means any significant shocks to the economy from the second wave of the pandemic could see it push out the hikes and hold the benchmark rate, especially if it trims its inflation forecast further. Uncertainties over the outlook for the economy and price growth also mean the panel hasn’t “closed the door” on rate cuts, Deputy Governor Fundi Tshazibana said in November.
The central bank has said it would continue buying government bonds in the secondary market if more dysfunctionality arises and the risks posed by the pandemic means it’s too early to talk about unwinding its holdings.
What Bloomberg Economics Says: “The South African Reserve Bank has cut rates by 275bps in response to the Covid-19 crisis and sees this as enough for now. It is now looking to a gradual normalization of rates but has kept the door open for more easing. We think a choppy recovery will force the SARB to push back the two rate hikes it has signaled for 2H21, with rates staying on hold through 2021.”

Banco de Mexico: Mexico’s central bank in November put its record monetary easing cycle on pause, saying it needed to reassess an inflationary spike that saw price increases speeding past the 4% target ceiling between August and October. While inflation subsequently slowed down significantly, the bank still left the benchmark interest rate unchanged at 4.25% in December arguing it needed more time to see the trend consolidating. The first meeting of the year, scheduled for Feb. 11, will be key to see if Banxico resumes its rate cuts: Galia Borja, most recently the Finance Ministry’s treasurer, replaces Javier Guzman, one of the board’s most hawkish members, and this may tilt the balance of forces at the central bank after a split 3-2 vote in the last decision of 2020. Despite recent reductions, Mexico still has one of the G-20’s highest real interest rates — meaning borrowing costs adjusted for inflation.
What Bloomberg Economics Says: “We expect the central bank to reduce the monetary policy interest rate to 3.0% this year from 4.25% in 2020. Abating transitory shocks and weak domestic demand point to lower inflation that would allow resuming the easing cycle. High unemployment and favorable external financial conditions should also contribute. The central bank will has a more dovish bias starting this year as President Andres Manuel Lopez Obrador has appointed three board members, out of five.”

Bank Indonesia: Bank Indonesia has been among Asia’s most aggressive central banks in slashing interest rates, and has pledged to keep monetary policy accommodative in 2021 for as long as inflation allows. Foreign fund inflows spurred by optimism over a vaccine should lift the rupiah and give the central bank room to maneuver if Southeast Asia’s worst Covid-19 outbreak weighs further on economic recovery prospects. Talk of increased government oversight of Bank Indonesia has quieted down but not disappeared entirely, as President Joko Widodo renewed calls for the central bank to do more to support the economy. Governor Perry Warjiyo has said he’s ready to use all the policy tools at his disposal, especially as bank lending rates have remained stubbornly high despite five rate cuts in 2020. While Bank Indonesia will no longer directly fund the government’s budget deficit, it will remain a standby buyer of government securities.
What Bloomberg Economics Says: “Bank Indonesia paused its rate cut cycle in December and didn’t signal more cuts. Even so, we expect the combination of rupiah gains from capital inflows and still-sluggish domestic demand to provide scope for another 50 bps of easing in 2021. Though monetary transmission is weak, more cuts would rein in government borrowing costs as its debt balloons. The central bank’s purchases of government bonds will likely continue but at a much more moderate pace.”

Central Bank of Turkey: Turkey’s new central bank governor is spearheading a boost to the monetary authority’s credibility with market-friendly messages and back-to-back increases to the key funding rate. Naci Agbal’s first step as governor after his abrupt appointment in November was ending a complex rate-corridor structure criticized for its use of multiple rates and lack of transparency, moving Turkey to a more orthodox framework where all funding is provided through the benchmark. He also delivered two meaty interest-rate hikes, bolstering investor confidence in Turkish assets. The governor, who inherited double-digit inflation, a low real interest rate, a weak lira, and depleted foreign-currency reserves after his predecessor spurred a period of rapid credit growth, pledged to keep the policy tight and prioritize price stability in 2021. So far, investors and economists have welcomed Agbal’s stewardship of monetary policy.
What Bloomberg Economics Says: “A return to orthodoxy under a new governor saw the central bank of Turkey more than doubling interest rates since July. Reversing this tightening will be slow and gradual. Before cutting rates, the bank will want to see a moderation in credit growth, an improvement in the current account, greater lira stability, and slower inflation. We don’t expect these conditions to be met until 3Q21.”

Central Bank of Nigeria: The Nigerian central bank is under pressure to aid the recovery of an economy that’s in recession, even after 200 basis points of cuts in 2020. However, inflation at a 34-month high and a currency that had to be devalued three times in 2020 complicates the outlook for monetary policy.
Nigeria’s system of multiple exchange rates and curbs on dollar access have been key drivers of inflation and a drag on economic growth, with importers resorting to the more expensive parallel market to get hard currency. Central Bank Governor Godwin Emefiele and Finance Minister Zainab Ahmed have said they would seek a more flexible and unified naira.
Still, there is no timeline for this yet and the IMF and World Bank said in December authorities should speed up these reforms to support the economy. Inflation will remain at double digits if the central bank doesn’t reform monetary policy to focus on price stability, and easing is unlikely to give any additional boost to output, according to the IMF.
What Bloomberg Economics Says: “Nigeria’s inflation rate continues to surge and has been stuck above the central bank target range for the past five years. However, the Central Bank of Nigeria has overlooked the recent uptick, choosing instead to support the economy with a 200 basis point interest rate cut. We expect it to hike rates again this year when the recovery has gathered pace and the policy focus shifts back to inflation.”

Bank of Korea: The Bank of Korea is likely to stand pat on its benchmark interest rate and continue to dial down talk of unconventional measures such as full-scale QE as long as the economy continues to recover with the help of improving exports. The recent resurgence of the coronavirus is the key threat to the budding economic rebound that the central bank has helped to create with record-low rates, government bond purchases, cheap loans and other measures.
The South Korean central bank faces other challenges heading into 2021, too. Political pressure is growing on the bank to adopt employment as another official mandate, while criticism over ultra-low borrowing costs fueling housing prices across the country is limiting its room for policy maneuver. A strengthening won that could weigh on South Korea’s exporters is another growing concern. The majority of economists surveyed by Bloomberg see the bank holding its policy rate at the current level for another year and a half.
What Bloomberg Economics Says: “The Bank of Korea has likely reached the end of its easing cycle. While uncertainties surrounding the pandemic remain high, South Korea’s economy is poised to rebound in 2021 and the central bank remains concerned about growing financial risks. The BOK has cautioned that the government’s large borrowing plans could lead to bond market imbalances, but we think it will continue using ad-hoc bond purchases to contain yields rather than shift to QE.”

Reserve Bank of Australia: With the local economy recovering at a faster pace than expected, the RBA isn’t seen adding to the stimulus over the coming year. That switches the focus to the RBA’s QE program and whether the bank will extend it beyond its current six-month run. The bank introduced the QE to keep a lid on a relentless appreciation of the Australian dollar. The rise in the currency partly stems from an increase in longer-term yields above those of major international counterparts. As the RBA’s variant of yield-curve control focuses on three-year debt, the QE targets 5-10 year securities outside the YCC framework. If the Aussie dollar keeps trying to edge up as the labor market heals, iron ore prices stay high and consumers spend, the RBA will likely stick with the buying of longer-dated bonds beyond April.
What Bloomberg Economics Says: “The Reserve Bank of Australia took the plunge into asset purchases and yield curve control in 2020. In 2021, it’s likely to fine tune policy, with further easing via adjustments to bond buying rather a lower cash rate. One aim will be to curb currency appreciation — at the cost of fueling asset inflation. The reinstatement of macro-prudential policy restraints may complement efforts directed at boosting domestic demand and absorbing labor market slack.”

Central Bank of Argentina: Argentina’s central bank has taken an incipient turn to more orthodox policies in a bid to reduce volatility in the peso. After a massive rate-cutting cycle for most of 2020, policymakers slightly raised the benchmark in November to provide an incentive to savings and investment in pesos. They have also marginally relaxed some of their strict foreign exchange controls, allowing currency exchange stores to partially reopen for business. Future monetary policy will likely become clearer when Argentina reaches an understanding of a new program with the International Monetary Fund. Negotiations are ongoing and the government aims to close a deal by March or April. Until then, the central bank’s reserves, now at a four-year low, will remain a major source of concern — and the reason why policymakers maintain strict controls, including two separate taxes on dollar purchases.
What Bloomberg Economics Says: “Tight capital controls allowed the BCRA to maintain the combo of an overvalued currency and negative real interest rates over 2020. We find it unlikely that the BCRA will be able to sustain a similar line of policy in 2021, under an IMF agreement, even if capital controls remain in place over the year. We believe it is more likely that the BCRA raises the policy rate to bring real rates back to positive territory, at the same time it attempts to gradually weaken the peso in real terms. A pre-condition for that is a fiscal adjustment that reduces the reliance on money issuance to fund the public deficit.”

Swiss National Bank: The SNB is still pursuing its policy of negative interest rates and currency market interventions, despite having been censured by the U.S. for the practice.
In light of the small local bond market, the strategy is “the most effective” available, SNB President Thomas Jordan said in the mid December. The economy suffered its biggest in contraction in decades in 2020 due to the pandemic, and the SNB forecasts that inflation will be stuck around zero over the next two years.

Sveriges Riksbank: Sweden’s central bank remains focused on buying assets to keep rates low and stabilize markets, while the minutes of its latest meeting show the prospect of an interest rate cut from zero was again raised by some board members as a way to restore confidence in the Riksbank’s inflation target. The central bank surprised markets in November with a bigger-than-expected expansion of its asset purchase program, to 700 billion kronor ($82 billion). It kept rates unchanged, as expected, but said there’s room to deliver more stimulus between scheduled meetings. Governor Stefan Ingves has signaled he prefers QE to rate cuts. He said last month that the size of the Riksbank’s balance sheet can be made “much larger if need be” as it’s small in relation to GDP compared to that of the ECB and the Fed. While long-term inflation expectations are holding up, for now, policymakers have voiced concerns over the erosion of confidence in the bank’s ability to fuel price increases. In recent months, inflation has edged closer to zero and further away from the central bank’s target of 2%.
What Bloomberg Economics Says:“Sweden will suffer a smaller economic hit than most from Covid-19 and our base case is that the Riksbank keeps policy unchanged in 2021. Still, Governor Stefan Ingves is more likely to cut than to raise rates. Inflation has on average been below target in the past five years, a stronger krona looks set to cap import prices, and wage talks held under the shadow of the virus produced only modest wage increases until 2023.”

Norges Bank: Norway’s central bank has been pegged as the first among holders of the world’s major currencies to tighten policy as the economy recovers, with its latest forecast implying an interest rate increase from the first half of 2022. Governor Oystein Olsen still signaled in December that significant uncertainty remains, as the pandemic tightens its grip across Europe, warranting no rate increases from the historic low until “there are clear signs that economic conditions are normalizing.” Norway faces a milder economic hit from the pandemic than most other countries, thanks in part to an effective lockdown strategy and billions of dollars in government support packages backed by the country’s $1.2 trillion sovereign wealth fund. The central bank has never cut rates below zero or experimented with QE. 
What Bloomberg Economics Says: “Abundant fiscal support to households and businesses is helping Norway bounce back from the dual hit of the pandemic and a sharp drop in oil prices. We expect this will allow Norges Bank — which takes both inflation and financial stability into account — to lift rates in early 2022. With house prices and credit growth on the rise, if anything the lift-off will come sooner.”

Reserve Bank of New Zealand: The New Zealand economy’s V-shaped rebound from the recession, aided by the country’s successful containment of Covid-19, has seen investors remove all bets that the RBNZ will cut its cash rate into negative territory in 2021. Instead, the focus has shifted to the booming property market, which has shone a light on the potential pitfalls of record-low borrowing costs. While Governor Adrian Orr has rebuffed a suggestion from the finance minister that house prices be included in the RBNZ’s monetary remit, the political heat may make it harder to loosen policy any further. The central bank remains concerned about global downside risks, but with the local economy performing better than anyone expected, attention may soon turn to when the RBNZ could begin to taper its bond purchases.
What Bloomberg Economics Says: “Rising house prices are set to complicate, but not totally constrain, the Reserve Bank of New Zealand’s options to deliver further easing over 2021. Negative rates are a risk but a low one. More likely — further QE. We see the RBNZ boosting the Funding for Lending program and its asset purchases. It’s also likely to get tougher on the macro-prudential front given the hot property market and concerns around high-risk lending.”

National Bank of Poland: Poland’s central bank probably will hold its benchmark interest rate at a record low of 0.1% as QE, rather than negative interest rates, remains the preferred tool to buoy the economy. The bank reduced the key rate by 140 basis points between March and May as well as launching an open-ended buying of government-guaranteed bonds to help finance support programs for businesses. While a 7.7% quarterly rebound in GDP between July and September helped offset much of the slump that resulted from the spring Covid-19 lockdown, Poland’s economy remains on track for its worst year since communism collapsed three decades ago.

Czech National Bank: The Czech central bank is one of few in the world flagging higher borrowing costs to keep a lid on inflation once growth resumes. Its forecast implies three hikes in 2021, starting in the second quarter, but Governor Jiri Rusnok has said the tightening will probably start later. The bank says the full impact of one of the worst Covid-19 outbreaks in Europe will only be clear once programs to protect jobs and business expire. The monetary outlook has become more complicated after the government proposed a record income-tax cut, which may further boost inflation. “The need to consider some future, gradual interest-rate increases toward normal levels have slightly increased,” Rusnok said in December. “On the other hand, anti-inflationary risks are also significant.”

Source: Bloomberg Business News