Central Bank Policies

22nd October 2021

BOC (WED): The Bank of Canada is expected to maintain the overnight rate at the effective lower bound of 0.25%. Weekly asset purchases are likely to be tapered once again, reduced to a rate of CAD 1bln/week (from the current CAD 2bln/week). ING suggests the programme will likely conclude in December as the market increasingly prices in 2022 rate hikes, where three hikes are now priced for next year due to recent rises in inflation. BoC Governor Macklem recently warned that supply chain issues and bottlenecks were not easing as quickly as initially hoped, but he did however state that medium-term inflation expectations were well-anchored, and he was not seeing evidence of sustained inflation just yet. Currently, the bank's guidance is for rate lift-off to occur sometime in the second half of 2022, and with money markets pricing in a more hawkish course for the BoC, focus will be on any language changes to this guidance. ING does not expect a tweak to guidance at this meeting, which may disappoint those looking for a hawkish shift from the central bank, seeing such changes as more likely in December as the taper process is concluded. Since the last MPR meeting in July, economic data has been mixed: inflation continues to pick up, as illustrated by the pick-up in the average of the three BoC core inflation measures, which has risen to 2.67% from 2.57% in the latest month, while headline CPI was 4.4% Y/Y, an 18-year high. Meanwhile, GDP data has disappointed expectations since the July MPR meeting, though StatsCan estimates a +0.7% M/M gain in August data. Employment, however, has been solid. Analysts think the BoC will raise inflation forecasts within its updated projections, and continue to reiterate its 'transitory' view of price pressures

ECB POLICY DECISION (THU): Policymakers are expected to stand pat on rates once again, and are likely to keep the size of its PEPP envelope unchanged at EUR 1.85trl, with purchases set to run until at least the end of March 2022. With the Q4 pace of PEPP purchases decided at the September meeting, and an absence of staff economic projections, the upcoming meeting is expected to be more a case of managing expectations ahead of an anticipated December policy showdown. The meeting takes place against the backdrop of headline Eurozone inflation running at 3.4% Y/Y in September (vs 3.0% Y/Y in August), albeit the Governing Council is likely to continue classifying price pressures are transitory in nature, as opined by President Lagarde in a speech in September; Lagarde said that the key challenge is for the ECB to not "overreact". That said, given increasingly hawkish impulses from other global central banks, market expectations have become more hawkish, and now price rate lift-off of 10bps in late 2022. Desks note that such market pricing is unlikely to chime with current ECB guidance, which looks for an unwind in APP/PEPP before rate lift-off. Although the future of APP/PEPP is yet to be determined, market pricing, when allied with sequencing and the ECB's recent strategy update/new inflation target, is perhaps too aggressive. Accordingly, Chief Economist Lane this week said that it is challenging to reconcile this pricing with ECB forward guidance. On APP/PEPP, the future of these programmes will be a topic of discussion in December. However, the October press conference might provide some hints on what to expect at the final meeting of the year. A recent report citing 'sources' suggested that the central bank was looking to formulate a new bond-buying scheme that would replace PEPP, while complimenting APP by adopting greater flexibility than the latter programme. ECB speakers have recently focused on the flexibility that any PEPP replacement should with the more dovish elements of the GC naturally favouring a more flexible approach than their hawkish counterparts. Again, this is likely to be more of a focus for the December meeting, but it will be interesting to see if any signs of friction on the GC begin to emerge ahead of the final meeting of the year. That said, Danske Bank believes the ECB will attempt to make the meeting as uneventful as possible

RBA MINUTES REVIEW: The RBA October meeting minutes said that the Delta variant had interrupted the recovery, although the central bank's base case is for the economy to return to growth in Q4, and to the pre-Delta path in H2 2022. The minutes also said the recovery was likely to be slower than the pace seen late last year/ early this year, and members agreed that although less monetary accommodation would reduce housing prices and credit growth, it would also result in fewer jobs and lower wage growth. Further, the minutes reiterated that the central bank remains committed to maintaining highly supportive monetary conditions, and will not raise rates until CPI is stable between 2-3%. Analysts at Westpac agreed that the minutes "revealed very little evidence of any potential change in policy