It’s work in progress for central banks. But the meaning of this phrase differs depending on the bank in question. For the Fed it means taking policy rates another big step towards restrictive territory. The ECB seems to be edging in a similar direction, with the clear acknowledgement at their September policy meeting of the need to raise rates much further. For these central banks, one of the key questions is whether the neutral rate – the point at which policy becomes restrictive – has increased. Financial markets will probably give a verdict on this matter, with flat or inverted yield curves already hinting at a restrictive policy stance.
For the PBoC, ‘work in progress’ means managing the economic impact from a declining property market and Covid outbreaks, while trying to prevent the manifestation of higher inflation that is visible elsewhere. We still think further easing in China is more probable than tightening. In the case of the BoJ we see only incremental progress towards a change in policy stance. Underlying inflation drivers simply have not moved much. But with pressure building on the JPY, we do expect some changes to their yield curve control policy. Work in progress indeed.