Central bank watcher: Different worlds

The third week of December brought further rate hikes by central banks in Norway, Chile, Mexico, Colombia, Russia, and Hungary. In the same week, the Bank of England also delivered its first pandemic-era rate hike, while the Fed announced it was speeding up the completion of its asset purchase program, paving the way for rate hikes in 2022.

One might receive the impression that global central banks are rushing to exit their loose policies. But that is not the case. In the world’s second largest economy, China, the central bank has recently shifted to a full-fledged easing mode, and in the world’s third largest economy, Japan, the central bank is only stepping away very slightly from a very accommodative policy.

What’s more, while the ECB announced the end of one of its QE programs, PEPP, it still needs to wind down its regular program before rate hikes become imminent. So, while inflation has risen and global supply factors play an important role in this surge, it feels like a different world when it comes to central bank policy responses.

Nevertheless, we don’t foresee a material change or large divergence within the climate for major developed market bond markets. The interconnectedness of these markets and the still-subdued, long-term outlook for DM central bank policy rates suggests that the upward potential for longer-term yields, similar to the past decade, remains modest. More recently, flight-to-safety buying in the wake of the spread of the Omicron variant has helped keep longer-term yields in check.