Central banks took the backseat for much of the coronavirus pandemic while fiscal policy did the heavy lifting. But as economies begin to recover and governments attempt to manage the legacy of higher debt, the world of central banking is set to become more interesting again.
- Vaccines and associated economic recoveries will not cause central banks to tighten policy. There is still significant spare capacity in most economies and monetary policy support will be needed all the more as fiscal support expires.
- The Fed and the ECB will continue buying assets at least until the end of 2022 and interest rates will be kept at rock bottom for several years to come.
- Policy will also be kept looser than is generally anticipated in the emerging markets, with more rate cuts to come in Russia and Mexico, for example.
- China is a key exception. We expect PBOC policy rates to rise by 30bps in 2021, whereas most analysts think the monetary authority will remain on hold.
- The pandemic may have been the final nail in the coffin of inflation targeting as we know it. Central banks in advanced economies will keep interest rates low across the curve as governments struggle to manage their higher debt loads. Some, including the Fed, are likely to tolerate higher inflation in future to achieve this aim.