Major Central Bank Roadmap Update

Six major central banks meet next week. Their respective policy stances should underpin our strong dollar call as monetary policy divergence should continue. The Fed and Norges Bank are likely to burnish their hawkish credentials, while BOE, BOJ, Riksbank, and SNB are likely to tilt dovish. RBNZ should join the ranks of the hawks with a hike next month, while the RBA delivered a dovish hold this month. Despite some rumblings, we believe the ECB will remain firmly in the dovish camp. BOC falls somewhere in between, with lift-off expected in H2 2022.

We have passed peak global liquidity. Some major central banks have already started tapering asset purchases, while others are inching closer to doing so and even hiking rates outright. In EM, many central banks are already hiking or about to. We have moved past the point at which global liquidity is fully supportive for EM and other risk assets. This does not necessarily mean we will enter into a risk-off phase since it is well anticipated but it will be ever more important to continuously adjust our views to the changing speeds of accommodation and removal. This piece lays out our views on the major central banks going forward, while the next one will cover EM central banks. We will then address the ways in which the liquidity inflection point will matter for global financial markets.

AMERICAS

After delivering a hawkish hold at the June 15-16 meeting, the FOMC has continued to prepare the market for tapering. Tapering made its way into the official statement of the July 27-28 meeting. Most Fed officials shifted to a much more hawkish stance, but Powell had the final say with a very dovish speech at the Jackson Hole Symposium in late August. The weak August jobs report is likely to prevent the Fed from making an explicit tapering announcement at next week's FOMC meeting.

That said, we do not believe that tapering discussions have been derailed. We expect the official statement and minutes from the upcoming FOMC meeting to confirm this by continuing to lay the groundwork for tapering. That said, the Fed is likely to refrain from setting out any sort of timetable at the September 21-22 meeting, waiting instead until the November 2-3 meeting to make an official announcement. Consensus sees the Fed starting to taper in late 2021 or early 2022 and then starting to hike rates in early 2023, which are ultimately dollar-supportive if underpinned by an economic recovery and not just rising inflation and inflation expectations.

New macro forecasts and Dot Plots will be released at the September 21-22 FOMC meeting. According to the Fed's June projections, it will have met its dual mandate by the end of 2023 and new projections should underscore this. We suspect that the macro forecasts will be upgraded modestly at next week's meeting. Of note, 2024 will be added to the forecast horizon and this will be another crucial part of the Fed's forward guidance.

Recall that in the June 15-16 Dot Plots, seven FOMC members saw the first hike in 2022 vs. four in March. This shift was enough to move the median expectations for lift-off forward into 2023. The September 21-22 Dot Plots will be very interesting, and we suspect that more than seven will see the first hike coming in 2022. By our calculations, if another three policymakers move their lift-off expectations up to 2022, then the median will also shift forward to 2022. This is a hawkish shift that is certainly possible. The Fed Funds futures strip shows solid odds for the first hike starting in Q4 22. Those odds quickly jump to being nearly fully priced in Q1 23. Similarly, Bloomberg consensus sees the policy rate at 0.25% until Q3 22, when odds of a hike start rising and become nearly fully priced in Q1 23.

Bank of Canada delivered a hawkish hold at its last meeting September 8. Rates and the weekly QE pace were maintained at 0.25% and CAD2 bln, respectively. The bank reiterated that the current inflation spike is still viewed as transitory. The bank added that future changes to QE will be guided by the economic recovery, with growth expected to pick up in H2 21 after the shock Q2 contraction. All of this was pretty much as expected, though the comment about future changes to QE suggests that the next round of tapering could be delayed if the economy remains weak in H2. It tapered at the July 14 meeting and most expect the next round of tapering will come as soon as Q4.

Next policy meeting is October 27 and another round of tapering seems likely. New forecasts will be released then and those meetings are when the bank has tended to taper this year (also in April and July). The bank continues to see economic slack absorbed in H2 2022, which implies lift-off then. There is a risk that tapering is delayed until December if the data don't pick up.

Governor Macklem recently set forth the bank's timeline for removing accommodation. He noted that after QE ends, the bank will pivot to a 'reinvestment phase' that will reinvest maturing securities to maintain the size of its balance sheet. Macklem said those purchases likely will average about CAD1 bln per week, adding that 'Eventually, the reinvestment phase will end, and we will stop purchasing bonds to replace the ones that are maturing. It is reasonable to expect that when we do eventually need to reduce monetary stimulus, our first move will be to raise the target for the overnight rate - our policy interest rate.' This implies that lift-off is likely before the bank starts to shrink its balance sheet.

EUROPE/MIDDLE EAST/AFRICA

The ECB delivered a hawkish hold at the last policy meeting September 9. Interest rates and the size of PEPP were all left unchanged at 0% and EUR1.85 trln, respectively. However, the bank announced that the pace of PEPP buying in Q4 will run at 'a moderately lower pace' than in past quarters. The ECB stressed that PEPP will be used 'flexibly' according to market conditions. Lagarde said that the 'recalibration' was for the next three months, which suggests that if the recovery falters, the PEPP pace can be recalibrated again for Q1. We think that Madame Lagarde is well aware of the ECB's past history of tightening too soon, mostly by her fellow countryman Trichet. She may have thrown this bone to the hawks whilst looking ahead to fight another fight to extend QE next year.

According to Lagarde, 'The lady isn't tapering.' Was this a taper? Yes and no. No, in that the size of PEPP remains unchanged. The EUR1.85 trln was always seen as a ceiling and one could say that the accelerated pace in Q2 and Q3 was meant to be temporary and subject to recalibration. Yes, in that the weekly asset purchases will be lower going forward. In a sense, this crystallizes the stock vs flow debate. Does the size (stock) of the ECB's balance sheet matter or does the weekly purchases (flows) matter? Either way, this was a modestly hawkish hold. Lagarde has already hinted that PEPP could somehow be folded into its long-standing AP and extended beyond March. Recently, she said that PEPP's fate would be addressed at the December 9 meeting, effectively rendering the October 28 meeting a non-event.

Macro forecasts were updated this month. This is a fairly upbeat outlook but the inflation forecasts are telling us the ECB sees no need to hike rates until 2024 at the earliest. The 2024 forecasts will be added at the December 15 meeting and will be another element of forward guidance. If the 2024 inflation forecast is below 2% (which is likely), that would suggest no hikes until 2025.
ECB denied hawkish comments that were attributed to Chief Economist Lane.

The FT reported that Lane had told analysts privately that the ECB expects to reach its 2% inflation target by 2025. Official ECB statement said 'The FT story is not accurate. Mr. Lane didn't say in any conversation with analysts that the euro area will reach 2% inflation soon after the end of the ECB's projection horizon.' The FT also cited unpublished internal models that suggest the ECB is on course for lift-off in just over two years. The ECB stressed the that notion 'that a lift-off of interest rates could come already in 2023 is not consistent with our forward guidance.' We concur and note that new forecasts from last week's ECB meeting are not consistent with the FT story.

Recent softness in the real sector data should lead the Bank of England to deliver a dovish hold next week, just as it did at the last meeting August 5. All policy settings were left unchanged then, though the vote to main QE was 7-1 with Saunders dissenting in favor of reducing QE from GBP875 bln to GBP830 bln. Some were looking for two dissents. New inflation forecasts were released then. The inflation forecasts suggest no hurry to hike and no need to hike aggressively. 2024 will be added to the forecast horizon with the next update to the macro forecasts that will come with the next decision November 4.

Forward guidance was changed in August but there is less than meets the eye. The bank warned that some modest tightening over the forecast period will likely become necessary. Yet the forecast period ends in 2023 and so a hike before that is not exactly earth-shattering since the short sterling strip already has had the first hike priced in for H1 2022 for months now. To provide further clarity, the bank also set forth the process for paring back QE. It said that it intends to unwind QE when the policy rate is at 0.5%, presumably by allowing maturing securities to roll off. The bank said it would then consider actively selling bonds when the policy rate is at least 1.0%. The modification to the forward guidance is welcome, especially given its pretty explicit roadmap for exiting QE.

Swiss National Bank is likely to deliver a dovish hold next week, just as it did at its last meeting June 17. It maintained its softer guidance from its last meeting on March 25, still characterizing the franc as 'highly valued' and pledging to continue FX interventions 'as necessary.' Inflation forecasts were tweaked modestly higher, but the policy rate is likely to remain at -0.75% for the foreseeable future as SNB President Jordan noted that 'Short-term inflation expectations have risen globally. However, these effects should have abated in a few quarters' time.' We believe the policy rate is likely to remain at -0.75% for the foreseeable future. The SNB's inflation forecasts are 0.4% for 2021 and 0.6% for both 2022 and 2023. Next policy meeting is September 23 and no change is expected.

Norges Bank is widely expected to become the first major central bank to hike rates next week. It delivered a hawkish hold at its last meeting August 19 and affirmed its forward guidance from the June 17 meeting that it would 'most likely' hike rates in September. Last month, the bank noted that 'The reopening of society has driven a marked rise in activity, and unemployment has fallen further. Increased activity in the Norwegian economy suggests that inflation will pick up further out.' New forecasts and an updated rate path will be released next week. The June rate path saw the policy rate at 0.1% at end-2021, 0.8% at end-2022, 1.3% at end-2023, and 1.5% at end-2024. Since the June meeting, Governor Olsen has suggested that the bank could hike rates 25 bp per quarter, which was much more hawkish than that rate path would suggest. Next policy meeting is September 23 and a 25 bp hike is expected. Forward guidance then will be key for determining the likely pace of the tightening cycle.

Sweden's Riksbank is likely to deliver a dovish hold next week, just as it did at its last meeting July 1. Then, the bank noted progress but warned that 'the pandemic is not over, and there are new variants of the virus that are creating uncertainty with the risk of setbacks.' It kept rates steady at 0.0% and maintained its QE program at SEK700 bln, maintain forward guidance that its QE program will be fully utilized by the end of 2021 and that its size will be maintained at least until end- 2022. The flat rate path was extended then by another quarter to Q3 2024. 2024 will be added to the forecast horizon at the November 25 meeting. Next policy meeting is September 21 and the flat rate path is likely to be extended to Q4 24.

ASIA

The Bank of Japan is likely to deliver a dovish hold next week, just as it did at the last policy meeting July 16. There were no policy changes then but the bank released some details of its green lending plan. The policy rate and the 10-year yield target remain unchanged at -0.1% and 0.0%, respectively. On the green lending plan, the program's rollout will be gradual with zero-rate loans and exemptions for banks that lend to the sector from negative rate reserves.

New macro forecasts were unveiled in July. The bank saw targeted core inflation at 0.6% (0.1% in April) for FY2021, 0.9% (0.8%) for FY2022, and 1.0% (1.0%) for FY23. FY 24 will be added to the forecast horizon at the April 22 meeting. The bottom line is that core inflation is seen remaining well below the 2% target through FY23. As such, the BOJ has signaled that it intends to keep policy accommodative until FY24 at least. Growth is forecast at 3.8% (4.0% in April) for FY2021, 2.7% (2.4%) for FY2022, and 1.3% (1.3%) for FY23. Next policy meeting is September 21-22 and no change is expected then. The BOJ is on hold for the foreseeable future as markets await the next fiscal package. We do not believe monetary policy will be impacted by the upcoming change to the LDP leadership.

Reserve Bank of Australia left rates steady and commenced tapering at the last meeting September 7. The new weekly QE pace of AUD4 bln will be maintained until at least mid-February rather than mid-November, as the bank said the extension was needed due to a delay in the economic recovery and increased uncertainty stemming from the most recent outbreak. Despite concerns about the economic outlook due to the spread of the delta variant, Q2 GDP data showed the economy had stronger than expected momentum (0.7% q/q vs. 0.4 expected) as it entered the lockdowns in Q3. Much will of course depend on how the virus numbers look going forward but we suspect the RBA will continue the tapering process in a measured manner. Next policy meeting is October 5 and no change is expected then. New macro forecasts won't be released until the November 2 meeting.

RBA Governor Lowe recently pushed back against market expectations for rate hikes. Current pricing suggests lift-off by late 2022 but Lowe noted 'These expectations are difficult to reconcile. I find it difficult to understand why rate rises are being priced in next year or early 2023. While policy rates might be increased in other countries over this timeframe, our wage and inflation experience is quite different.' Lowe also downplayed the notion that it would hike to cool off the housing markets, noting 'I want to be clear that this is not on our agenda. While it is true that higher interest rates would, all else equal, see lower housing prices, they would also mean fewer jobs and lower wages growth. This is a poor trade-off in the current circumstances.' Instead, Lowe would rely on regulatory steps. Overall, Lowe's comments reinforce the bank's current forward guidance that it won't hike rates until 2024.

Reserve Bank of New Zealand delivered a dovish surprise and kept rates steady at 0.25% at the last meeting August 18. The bank said 'The Committee discussed the merits of an increase in the OCR at this meeting. The Committee agreed that their least regrets policy stance is to further reduce monetary policy stimulus to reduce the risk that inflation expectations become unanchored. However in light of the current Level 4 lockdown and health uncertainty the Committee agreed to leave the OCR unchanged at this meeting.' Later, Assistant Governor Hawkesby said a 50 bp hike was discussed then and stressed that the surprise decision to stand pat was due to fear of bad optics rather than economic risks. He said 'We put out a document that would have easily supported putting up the official cash rate last week. It was less about Covid stopping us doing it and it was more about the timing of communicating our policy move -- was the 18th of August the right day as the country went into lockdown.'

A 25 bp hike is fully priced in for the October 6 meeting, with solid odds of a potential 50 bp move. After that, 25 bp hikes are fully priced in for each of the November 2, February 23, April 13, and May 25 meetings. Updated rate path and macro forecasts will be released at the November 24 meeting. At the August 18 meeting, the RBNZ's expected rate path was updated to show the average OCR rising to 0.6% by end-2021, 1.6% by end-2022, 2.0% by end-2023, and 2.1% by Q3 2024, the end of the forecast period.

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