Weekly Update - Les banques centrales toujours dans le camp d’une inflation transitoire
Eurozone and US central banks in line with expectations
The beginning of the month was marked by the monetary policy meetings of the European Central Bank (ECB), the Federal Reserve (Fed) and the Bank of England (BoE). As expected, the ECB kept its key rates unchanged. It also maintained the pace of securities purchases and announced that "as things stand", the end of net purchases related
to the pandemic would take place as planned in March 2022. On the US side, as also expected, the Fed did not change its key rate and announced the tapering of its asset purchases program. More specifically, it will reduce its net purchases by 15 billion dollars per month starting in November (10 billion Treasuries and 5 billion MBS), which will stabilize its balance sheet in June 2022. On the other hand, the BoE surprised the markets by keeping its benchmark
rate at 0.1% while the market consensus was for a 15 basis point increase. It also kept its asset purchase program unchanged.
Central banks continue to defend the thesis oftransitory inflation
These decisions were highly awaited in a context where inflation in these 3 regions continues to be above the central banks' target and is expected to remain high in the coming months. During her press conference, Christine Lagarde maintained that inflation in the euro zone reflects transitory factors, namely the rise in energy prices, the increase in taxation in certain countries and the mismatch between supply and demand linked to the reopening of the economy.
Furthermore, she emphasizes that the conditions for a start to hike rates (inflation reaches 2% over a two-year horizon and remains at this level in the long term in the ECB's projections, core inflation compatible with total inflation at 2% over the medium term) would not be met in 2022. Jerome Powell, in a similar manner, also insisted on
the transitory nature of inflation, expecting it to return to the target during 2022. J. Powell also emphasized that the reduction in asset purchases was to be decoupled from the rate hike cycle, leaving it to wait for a real recovery in the US labor market to begin.
Financial markets question the transitory aspect of inflation
Ms. Lagarde and Mr. Powell's statements come at a time when financial markets are beginning to anticipate that inflationary pressures could be more durable than central banks had expected, forcing them to raise rates sooner and faster than expected. Thus, the markets are now anticipating two Fed rate hikes in 2022 and four rate hikes in 2023. On the ECB side, statements by Mrs. Lagarde and other ECB members have allowed a decrease in rate hike expectations after a visible adjustment in late October.
In an environment where inflation will remain high in the months to come with the risk of upside surprises, the interest rate market will remain volatile. The very cautious nature of central banks will continue to be favorable to equities and corporate bonds.