The Fed, ECB and the BoJ have signaled that it is way too early to contemplate an exit from accommodative policies. Markets nonetheless have started to fantasize about it.
Despite the arrival of vaccinations, parts of the global economy, especially the services sectors, are still struggling under the weight of new restrictions and lockdowns. This underscores the need for ongoing fiscal support in bridging economies to a time of population immunity, with monetary policy continuing to play a largely supportive role to fiscal policy. Although the Fed, ECB and the BoJ have signaled, either by words or action, that it is way too early to contemplate an exit, markets nonetheless have started to fantasize about it. They could get further inspiration in spring, when base effects, including of energy prices, lead to much higher headline inflation prints. In our view, however, that only gives rear-view information and shouldn’t be confused with a sustained rise in inflation. Still, we do not rule out that this might lead to some fresh 2s5s and 2s10s curve steepening pressures across developed markets.
Meanwhile, in China, underlying inflation remains subdued despite a much more advanced economic recovery. This, coupled with slower credit growth and fresh downside growth risks due to a sudden rise in new infections, limit the PBOC’s rate-hiking potential.