united kingdomen
Central bank watcher: Control freaks

Central bank watcher: Control freaks

19-04-2021 | Insight

Central banks are likely to keep policy exit expectations in check. But, while they may prefer to stay in control the near term, they will eventually – just like economies everywhere – have to open up.

  • Rikkert  Scholten
    Portfolio Manager
  • Bob Stoutjesdijk
  • Martin van Vliet
    van Vliet
    Strategist and member of Robeco’s Global Macro team

Speed read

  • Central banks’ loose stance will be tested in coming months
  • Policymakers will work hard to manage tapering expectations
  • Financial stability remains a priority

We see markets continuing along a path towards higher yields and (modestly) steeper curves in coming months, punctuated by brief periods of consolidation. Indeed, as the global economy opens up further, higher nominal GDP and inflation prints should lead to confirmation of the consensus view of higher yields – which will test central banks’ ultra-loose policy stance. However, policymaker caution is understandable in the face of the lingering pandemic risks. We therefore expect central banks to ensure policy exit expectations don’t spin out of control. The Fed wants to see further confirmation of a recovery in the labor market before it can shift towards QE tapering, while the ECB will aim to control bond yields to ensure financing conditions remain loose enough.

The balancing act of loose monetary policy versus financial stability of the PBoC and BoJ also remains in play; both central banks choose to control interest rates in the interim. In short, central banks prefer to stay in control near term but, like the economies, they will eventually have to open up.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates

Outlook for central banks policy rates

Timing tapering in the US

Reopening of the US economy has given rise to some exceptionally strong economic data in recent weeks and the positive momentum in especially consumer spending and labor market data is likely to continue in the coming months. In addition, US President Biden announced a plan to invest USD 2.3trn in (broadly defined) infrastructure and another trillion-dollar announcement on social spending is expected soon.

While the fundamental backdrop for higher US rates remains in place, there is probably some unwinding of positioning and a fresh impulse needed for a new leg upwards to materialize. Sharp intraday moves lower in yields in recent days (mid-April) suggest some of the unwinding is taking place. For a potential new impulse to bearish sentiment, we have our eyes on any signals pointing to a tapering of the Fed’s bond purchases.

The Fed wants to avoid surprising the market, which suggests the signaling will be well in advance of the official announcement and start of the tapering process. Our base case is for the reduction in asset purchases to start in January 2022 and to take a full year for completion.

More tolerance for rising yields in Europe

Despite the lingering lockdowns across the Eurozone, and the latest hiccups in vaccinations, we still believe that economic reopening could be well under way during the course of May. This implies that as the June meeting draws closer, the ECB might turn more tolerant of nominal yield rises. What is more, the market’s focus could increasingly turn to what will happen to the PEPP purchase pace after Q2 – which seems to be decided upon in June.

All this highlights a readiness to slow the PEPP pace after Q2. To be sure, according to our calculations there is room to continue PEPP at the January-February pace into Q2 2022 before fully using the EUR 1,850bn envelope. But markets might well interpret a Q3 slowdown as a first step towards phasing out PEPP – even though we would point out that a tapering of the ECB’s PEPP will be different from the Fed’s easing of QE, given the ongoing open-ended APP running in the background.

Download the Central Bank Watcher
With our latest analysis of global monetary policy.
Download the full report


Please read this important information before proceeding further. It contains legal and regulatory notices relevant to the information contained on this website.

The information contained in the Website is NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws. The value of the investments may fluctuate. Past performance is no guarantee of future results. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency.

In the UK, Robeco Institutional Asset Management B.V. (“ROBECO”) only markets its funds to institutional clients and professional investors. Private investors seeking information about ROBECO should visit our corporate website www.robeco.com or contact their financial adviser. ROBECO will not be liable for any damages or losses suffered by private investors accessing these areas.

In the UK, ROBECO Funds has marketing approval for the funds listed on this website, all of which are UCITS funds. ROBECO is authorized by the AFM and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.

Many of the protections provided by the United Kingdom regulatory framework may not apply to investments in ROBECO Funds, including access to the Financial Services Compensation Scheme and the Financial Ombudsman Service. No representation, warranty or undertaking is given as to the accuracy or completeness of the information on this website.

If you are not an institutional client or professional investor you should therefore not proceed. By proceeding please note that we will be treating you as a professional client for regulatory purposes and you agree to be bound by our terms and conditions.

If you do not accept these terms and conditions, as well as the terms of use of the website, please do not continue to use or access any pages on this website.

I Disagree