hongkongen
Central banks' post-pandemic playbook

Central banks' post-pandemic playbook

5-Year outlook
Central banks have thrown the proverbial kitchen sink at their fight to mitigate the economic impact of Covid-19. But what is their exit strategy now that the worst of the pandemic seems to be over? Global macro strategists Martin van Vliet and Rikkert Scholten and portfolio manager Bob Stoutjesdijk discuss the options for the central banks’ post-pandemic playbook.
  • Martin van Vliet
    Martin
    van Vliet
    Strategist and member of the Global Macro team
  • Rikkert  Scholten
    Rikkert
    Scholten
    Strategist
  • Bob Stoutjesdijk
    Bob
    Stoutjesdijk
    Analyst

Speed read

  • Net asset purchases set to be phased out as economies recover
  • Market focus to shift to timing of first interest rate hikes
  • Neutral rates in next hiking cycle likely to remain low

The world’s central banks led by the four heavyweights of the US Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan have done their utmost to support economies battered by Covid-19. They cut policy rates (close) to (or kept them below) zero, relaunched quantitative easing programs to support huge fiscal easing, and set up sizable lending programs for banks and even businesses. 

As a result, the balance sheets of many central banks have ballooned to historic highs. But as vaccinations have brightened the public health outlook, financial markets’ attention has now shifted to the process of exiting (some of) these stimulus measures. 

While the Bank of England and Bank of Canada have already announced reductions in the pace of their QE purchases, and the Reserve Bank of New Zealand even stopped buying bonds in July, other central banks like the Fed and ECB have not yet specified how or when they will end their QE-induced balance sheet expansion. 

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe
Central bank assets as a percentage of their relevant nation’s GDP. Source: Bloomberg, central bank websites, Robeco, August 2021.

GFC offers a clue

The Fed’s normalization process after the Global Financial Crisis offers a template for what could soon be in store. In December 2013 it started to taper its USD 85 billion monthly purchases by USD 10 billion following each Fed meeting, concluding the process in October 2014 before starting to raise policy rates in 2015. It did not start reducing the size of its balance sheet until 2018. 

Currently, the Fed is adding USD 80 billion in Treasuries and USD 40 billion in mortgage-backed securities to its balance sheet every month. If the Fed were to initiate a reduction in its monthly purchases of USD 15 billion in November and make a similar reduction at each of its subsequent meetings, tapering could be concluded in October 2022.

The ECB tapered its monthly net asset purchases, which were part of its 2015 Asset Purchase Program (APP) to zero between 2017-18. But due to the economic outlook worsening, in Q3 2019 it reintroduced net APP purchases, which are currently supposed to run until “shortly before” the start of rate hikes. Note that its net asset purchases under the pandemic emergency purchase program (PEPP), which was launched in March 2020, are expected to be phased out by the middle of 2022. 

Total targets vs. monthly amounts

The Bank of England’s purchase programs target a total amount of QE stock to be held. This is in contrast to the weekly or monthly target amounts without an end date set at other central banks. The current target for the BoE’s QE asset portfolio is GBP 895 billion. Our base case is for this target to be reached by the end of this year, which means that net monthly purchases – currently GBP 14 billion a month – would end in December 2021. 

The Bank of Japan’s QE program started as a reflationary and a foreign exchange policy tool in 2010 but has since transformed into a supplementary tool to the yield curve control policy (YCC) framework. The bonds it has purchased have mainly had maturities of under 10 years, making the policy less distortionary for long-end bonds. In our base case, we expect the Bank of Japan to continue with its current policy mix of YCC and QE over the coming years.

Much like the Federal Reserve and Bank of England, most other G10 central banks that have also engaged in sovereign QE since the start of the pandemic are expected to stop increasing their holdings in the course of 2022. The exception may be the Reserve Bank of Australia given the role of QE in its own YCC policy. 

No imminent rate rises among the big four

Regarding rate rises, the markets are generally not pricing in a first rate hike until H2 2022 for the Federal Reserve and Bank of England, late 2023 for the ECB, and not at all within the next five years for the Bank of Japan. Among these central banks, the Bank of England will probably be the first to hike rates. Our base case assumes an initial rate hike by the BoE in Q4 2022. The Fed is expected to follow in Q2 2023. 

Perhaps more importantly for bond yields is where policy rates are going to peak in any upcoming rate normalization cycle. Two things matter in this respect. The first is the cyclical inflation outlook and the associated need for policy changes. The second is the perceived ’neutral’ rate based on inflation expectations and real neutral rate estimates implied by markets or calculated by official institutions. These are shown in the table below.

Expected Returns 2022-2026
Expected Returns 2022-2026
Our new 5-year outlook
Read all articles
The range of neutral policy rate estimates for selected central banks Source: Bloomberg, IMF, Fed, ECB, BoJ, BoE, August 2021.
In our central scenario, policy rate peaks in the upcoming normalization cycles are likely to be in the lower part of the range of neutral policy rate estimates for the Federal Reserve and Bank of England and even below the estimated range for the ECB. In this scenario, consumer price inflation pressures do not spiral out of control, so do not warrant a contractionary policy rate stance, where actual policy rates need to exceed the nominal neutral rate.

Any new crisis

So, what might central banks do if a new crisis were to emerge over the next five years? Forward guidance, large-scale asset purchases, generous lending programs and macroprudential adjustments have all became ’normal’ components of the central bank toolbox. 

In any new recession, those that were able to hike rates in the run-up to it will quickly cut them back to zero. Some, including the Reserve Bank of New Zealand and Bank of England, will probably follow the examples of the ECB, Bank of Japan and Swiss National Bank and cut policy rates (slightly) below zero. 

And governments will yet again resort to running large budget deficits, supported by central bank bond purchase programs. We would also expect renewed and/or bolder private sector debt purchases – perhaps with broader adoption of equity ETF purchases like the Bank of Japan undertook – and  even larger and more generous loan programs to banks and (via banks) to the non-financial private sector

It’s time to unwind

In conclusion, our central scenario is that most central banks will aim to unwind many of the policies they enacted during the pandemic, but that they will struggle to do so in full. 

Assuming that fears of an inflationary regime change recede, our base case is that QE tapering will end next year (except for the Bank of Japan and ECB), most central banks start hiking rates in 2023. For most central banks, reducing their balance sheet holdings will only be on the agenda from late 2023 onwards, if at all. 

This article is an excerpt of a special topic in our five-year outlook.

Read the full Expected Returns 2022-2026 here.

Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.

Logo

Disclaimers

1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is to be accessed by “professional investors” only (as defined in the Securities and Futures Ordinance (Cap.571) and/or the Securities and Futures (Professional Investors) Rules (Cap.571D) under the laws of Hong Kong). The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong. 

Please click the “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree