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The Week Of Central Bank Meetings

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The Week Of Central Bank Meetings

ByJin Dao Tai

 SEP 17, 2021

The Week Of Central Bank Meetings


RBA – The last tapering for 2021.

The Reserve Bank of Australia (RBA) kept its words during the monetary policy meeting last Tuesday, tapering quantitative easing (QE) from the previous A$5 billion per week to A$4 billion per week. What came as a surprise was that the central bank extended the duration of the current round of QE from two months to at least five months. A bond purchase pace review was initially scheduled to be held in November 2021 but has now been pushed back to February 2022. Thus, any potential tapering of QE will only take place after February.

The argument that RBA Governor Phillip Lowe gave for the central bank’s decision to carry on with QE tapering is that the Australian economy will benefit more from the government’s fiscal policy than the central bank’s monetary policy. Furthermore, Lowe also mentioned that the A$1 billion difference in QE will only have a “marginal” effect on the Australian economy at the moment. Nonetheless, the RBA did not disregard the recent rise in concern over the contagious Delta variant. In the rate statement, the central bank explained that the extension of QE “reflects the delay in the economic recovery and the increased uncertainty associated with the Delta outbreak”. By closing its doors to any QE tapering for the next five months at least, the RBA is giving up the flexibility of amending its QE pace while buying some time for progress to be made in the containment of the Delta variant before considering further QE actions.

ECB – The lady isn’t tapering.

The European Central Bank (ECB) has finally made progress in terms of QE. Apart from holding interest rates and the size of its QE – the Asset Purchase Programme (APP) and the Pandemic Emergency Purchase Programme (PEPP), unchanged at their current levels, the central bank also announced a slowdown in the purchase of assets under the PEPP.

Initially, the slowdown in the pace of assets being purchased under the PEPP seems like the ECB has just carried out a tapering. However, the central bank’s President Christine Lagarde clarified during the press conference that the slowdown is a recalibration of the pace of QE so as to deliver on the goal of favourable financing conditions. It is by no means a tapering. As a result, the market was left uncertain on whether the slowdown is going to be significant. Moreover, the ECB did not provide any further details on how much the slowdown will be but at the moment, QE under the PEPP is being run at €80 billion per month.

Apart from the slowing down of the pace of PEPP, the ECB also expressed a more optimistic inflation outlook on the eurozone. The central bank’s inflation projection for this year has been revised upwards from the previous 1.9% to 2.2%, exceeding its 2% target. And as for 2022 and 2023, upwards revisions on inflation were also carried out, revising from 1.5% to 1.7% and 1.4% to 1.5% respectively. Although the medium term (2022 and 2023) inflation projections are still below the ECB’s target, the fact that upward revisions were made across the board hints that the central bank may be convinced that inflation is likely going to be sustainable and not transitory.

BOC – Staying low-key for now.

Being the only one out of the three central banks that made no new announcements last week, the Bank of Canada (BoC) held its interest rate unchanged at 0.25% as well as keeping its QE pace at C$2 billion per week. Nevertheless, it does not come as a surprise that the central bank decides to stay put for this month.

The main driver for this is the weaker than anticipated economic growth during the second quarter. The BoC explained that the GDP of -1.1% “largely reflects a contraction in exports, due in part to supply chain disruptions, especially in the auto sector”. Also, COVID cases has been rising throughout August due to the Delta variant and as such, the added uncertainty further convinces the central bank to hold back on any potential QE tapering plans. Lastly, with the ongoing Canadian federal election campaign, the BoC will want to stay low and not carry out any actions or make any strong remarks on the economic recovery to avoid getting politically involved in the campaign.

Although no tapering was carried out this month, the BoC is still on track towards at least another round of tapering by the end of this year. And with the final round of tapering likely taking place in early 2022, the central bank will most probably look for an interest rate hike later in the same year.

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