Central Banks - inching towards tighter monetary policy

Central Banks - inching towards tighter monetary policy

Norges Bank, the Central Bank of Norway, has raised interest rates for the first time since the beginning of the coronavirus pandemic. Interest rates had been 0% since March 2020, but the bank has now taken the first step in normalising policy by increasing the cash rate by 0.25%.


This makes Norway the first bank in the G10 to raise interest rates, but it appears it won’t be long before other central banks follow. Central bank communications around the world have been creeping towards a more hawkish stance over the last month. In the US, the FOMC released its quarterly update of the ‘dot plot’ - the graph that shows committee members’ estimates of where benchmark interest rates will be over the next few years. The latest publication showed that, since June, additional members were looking for more rate increases. Chair Powell also suggested that the QE programme would come to end by May 2022, earlier than market expectations. The FOMC stopped short of announcing the start of a tapering policy, but that is widely expected at the next meeting of the committee.


Returning to Europe - the Bank of England paved the way for a rise in interest rates, perhaps as early as November. There is also a growing minority within the MPC that would like to halt the current QE programme early, although it is due to finish at year end anyway and there is no appetite among members to extend it further. As it stands the Bank of England could raise interest rates earlier than the US FOMC, which would be unusual. Typically, the FOMC moves first, but the strength of both the UK economy and inflation is a concern for the Bank of England.


Even the European Central Bank has ‘recalibrated’ its bond buying programme to buy less per month than it was doing over the summer. It is expected to extend the PEPP, in some form or other, next Spring to avoid a sharp taper, but the suggestion of higher interest rates remains an outlier. However, by tapering purchases the monetary policy is becoming less accommodative, thus inching towards tighter policy.


Elsewhere, other central banks remain firmly on hold. The Bank of Japan and the Swiss National Bank announced no change in policy. In our view these central banks are the least likely to follow the trends in the US and the UK. The Japanese economy remains subdued and vulnerable to coronavirus led restrictions until more of the population becomes vaccinated. In Switzerland the SNB continues to believe the currency is overvalued and thus maintains its deeply negative cash rate of -0.75 %, now held unchanged since 2015.

Sandra Holdsworth

Head of Rates, Fixed Income

Sandra Holdsworth is Head of Rates in the Fixed Income team.

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