Central banks signal policy changes

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AUCKLAND: Central banks are starting to move away from their emergency monetary situation, with New Zealand following in Canada’s footsteps to signal a possible interest rate hike next year.

Markets grabbed the narrative of tightening on Wednesday, rocking New Zealand bond yields and its currency higher. As vaccine deployments continue and economies reopen, traders have slowly lowered their expectations of rising rates or slowing asset purchases elsewhere as well.

New Zealand’s outlook was much more belligerent than expected and could still signal a global shift, according to Sharon Zollner, chief economist at ANZ Bank New Zealand in Auckland.

“We cannot rule out that the tail may wag the dog, influencing the expectations of the world market as to whether other central banks might also take a more belligerent turn,” she said.

Financial markets have already put forward the price of the Federal Reserve’s first rate hike by nearly a year since early February.

During the same period, market expectations for the Bank of England (BoE) shifted from a rate cut by the end of 2022 to a rate hike, as investors nearly gave up on bets. on further cuts from the European Central Bank (ECB) instead of prices on a basis of 10-point upward movement by the end of 2023.

With major central banks involved in bond buying and other easing programs that are traditionally eliminated first, most rate hikes remain quite distant. But talk of curtailing asset purchases is gaining momentum.

Fed Vice Chairman Richard Clarida told Yahoo! Finance in an interview on Tuesday that there may be a point in upcoming policy meetings where officials can discuss reducing purchases.

Fed vice chairman for oversight Randal Quarles said on Wednesday it would be important for the central bank to start discussing in the coming months whether it intends to cut back on massive bond purchases if the economy continues to get ahead.

The BoE has slowed bond buying and has indicated it is set to end this support later this year. Australia’s central bank has set July as the deadline for deciding whether or not to extend purchases.

Norway is on track to start a hiking cycle and Iceland has already started. The Bank of Canada announced a reduction in debt purchases last month, as it forecast a faster economic recovery that could pave the way for rate hikes next year.

“The change in monetary policy is beginning,” said Alicia Garcia Herrero, Hong Kong-based chief economist for Asia-Pacific at Natixis, who previously worked for the ECB and the International Monetary Fund.

Detailing its new outlook, the Reserve Bank of New Zealand (RBNZ) on Wednesday released forecasts for its benchmark rate – for the first time in more than a year – which show the rate starting to rise in the middle. 2022.

New Zealand’s short-term rates, which are most responsive to the bank’s outlook, led the rise as markets baked into higher interest rates.

Of course, this change is still conditional.

RBNZ Governor Adrian Orr said the bank’s outlook rested on continued economic recovery as vaccines rolled out and the pandemic was contained.

Speaking at a press conference after the bank announced its new outlook, Orr stressed that rate hike expectations aren’t until the second half of 2022 and that “who knows where we’ll be by then.”

The Fed’s Clarida also nuanced her remarks on the jobs data and how inflationary pressures occur, which he expects to be transient.

It is also true that not all central banks signal a policy decision, especially in the euro area, where ECB executive board member Fabio Panetta said on Wednesday that he had not seen any change in policies. economic outlook to justify a reduction in bond purchases. . – Bloomberg



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