Central bank shift?
In a major shift following the pandemic and the unleashing of liquidity across the world, several central banks have signaled an end to quantitative easing and more importantly decided to raise interest rates. Canada, Australia, the UK and several other emerging market central banks are likely to increase rates as early as this year. The objective is mainly to counter rising inflation. These moves are also notable as they go against the Fed which is usually the first to move and lead the way for others.
As it stands, the Federal Reserve is expected to start tapering asset purchases in November with a view to end by the second or third quarter. It isn’t expected to start raising rates until the middle of next year but rising inflation could force its hand to act sooner. The European Central Bank has also vowed to stay the course and not rise rates in the short term.
As touched upon several times in this year’s column, inflation has been a major subject this year and its lasting effect is still up for debate. It was certainly induced by Covid but as supply chains ease and supply is able to meet demand will inflation subside? This is the view the Federal Reserve and European Central Bank are taking at the moment. With economies expected to accelerate as we return to some type of normal, it will be crucial that workforce participation increases as well.