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One of the central themes on markets over the last few months has been the prospect of the removal of accommodative monetary policies, against the backdrop of strong economic recovery and persistent inflationary pressure. We have just passed a key milestone. The US Federal Reserve has officially announced that it will begin tapering its asset purchases programme by USD 15 billion per month, with an end to the programme forecast for June 2022. Nevertheless, the week was characterised by a strong comeback of accommodative statements from various central bankers.
The opening salvo was fired by the European Central Bank. Christine Lagarde provided a follow-up service to her previous press conference, which had drawn criticism and raised the prospect of a hike in rates as early as summer 2022. In an attempt to calm market fervour, the ECB chief indicated that it was very unlikely that the conditions for a rate rise would be met in 2022, with the outlook for inflation in the medium term currently remaining modest.
On the same day, her US counterpart, Jerome Powell, did announce the beginning of tapering, but with a reminder that the start of a reduction in asset purchases was not connected to a potential rate hike. According to its Chair, the Federal Reserve will be “patient” before considering any changes to its intervention rates. The implicit message was that the leeway the central bank has given itself on the speed of tapering means that if it has to tighten its monetary policy, it will start by accelerating the reduction of its asset purchases before moving on rates.
The following day, the Bank of England completed the series with the surprising announcement that it was making no changes, despite most observers expecting a rise in its key rate. This was a startling decision given recent statements by Andrew Bailey, and was accompanied by a rather accommodative speech. The Monetary Policy Committee pointed to a risk of a slowdown in macroeconomic momentum and uncertainty as to when the employment market would return to normal.
This counterattack of the doves – a term used to denote central bankers in favour of accommodative policies – could prove to be a last stand, though. After this delay, the Bank of England is likely to raise its rates very shortly. It seems increasingly certain that the same will be true for the US Federal Reserve in 2022. The European Central Bank is under less pressure than its two counterparts, but will nonetheless have to decide on the future of its asset purchase programmes, starting with the Pandemic Emergency Purchase Programme (PEPP), which is due to expire in March 2022.
In reality, central bankers have first and foremost played for time and left themselves as many doors open as possible, in order to avoid any overreaction that would have an overly negative impact on the economy. The risk they run is finding themselves behind the curve as regards the momentum of growth and inflation, and making potentially badly timed decisions. For the moment, markets are looking favourably on this risk, as evidenced by the renewed rise in equity indices. But any strong figures for the labour market or inflation will make communication trickier for central banks, when they are already walking a tightrope.
Written on 5 November 2021 Enguerrand Artaz, Fund Manager and Olivier de Berranger, CIO