WHAT SHOULD WE EXPECT FROM CENTRAL BANKS IN 2022?

17.12.2021 The Bank of England raised interest rates yesterday while the US central bank also signaled an accelerated end to its money printing (Quantitative Easing) programme. What should we expect from monetary policy in 2022?

The Bank of England raised the Bank Rate from 0.1% to 0.25% yesterday. An important consideration behind the decision, with the annual rate of CPI inflation currently 5.1%, seems to have been a desire to underline that it is committed to price stability. Additionally, its corporate contacts reported that rising costs were increasingly and more frequently being passed through into prices. With CPI inflation now expected to peak at 6% in the Spring it is reasonable to expect four 0.25% interest rate increases in 2022.

This week also saw the US central bank, The Federal Reserve, announce the accelerated run down of its money printing (Quantitative Easing) programme. This is now expected to finish in March 2022 and will pave the way for a series of interest rate hikes. In the US headline inflation has risen to an annual rate of 6.8%:  the highest rate of increase since 1982. However, what seems to have spurred the US central bank into action has been the increasingly widespread nature of the price rises. Indeed, the annual core inflation rate (a measure that excludes volatile items such as food and energy) reached 4.9% in November.

By contrast the European Central Bank (ECB) appears much more cautious about tightening monetary policy. This reflects a decade of anemic growth and below target inflation. Indeed while 2022 inflation is forecast above target, 2023 and 2024 are seen below target. As a result, the ECB will moderate its monetary printing operations but is not expected to raise interest rates imminently.

The impact on financial markets of tighter monetary policy will come from the US central bank ending its USD 120 bn per month money printing programme. This is likely to mean less money chasing a limited set of investment opportunities in 2022 and a correction in global equity markets.

Categorised in: Uncategorised

This post was written by Robin