International central banks: US Fed is paving the way

The signs are growing that the Federal Reserve will begin to cut back bond purchases as early as November as part of the “quantitative easing” program. Corresponding indications emerge not only from the minutes of the most recent monetary policy deliberations of the relevant Federal Open Market Committee, but also from recent speeches by central bankers Richard Clarida and Michelle Bowman. Since mid-March 2020, the Federal Reserve has been buying federal government treasury bills and mortgage bonds issued by state-backed agencies averaging $ 120 billion every month.

Central bankers agree that the economy has made "substantial further progress" in terms of price stability and employment. This fulfills the criterion set by the Fed itself, from which the purchase program is to be reduced. "Assuming the economy continues to improve as I expect, then I am very happy with the decision to scale back bond purchases before the end of the year, preferably in November," said Bowman. She fears that the cost of continuing the purchase program could fuel real estate and equity valuations and that a continuation of extremely loose monetary policy could jeopardize the stability of inflation expectations.

Clarida, who has the ear of Fed chairman Jerome Powell, had previously been somewhat more cautious: he did not name a month for the trend reversal and limited himself to pointing out that a containment of the program could “soon” be justified. Central bankers agree that the purchase program could be suspended by the middle of next year if America's economy continues to develop as expected. The reduction is to take place in monthly steps in the amount of 15 billion dollars, distributed across both classes of securities, according to the minutes of the September meeting of the Fed. Some central bankers were open to a faster reduction.

“The US Fed prepared and communicated its move so well that it no longer surprised the markets too much.

We therefore do not expect the exchange rate and bond yields to react so strongly that this could put the ECB under pressure, ”said Holger Schmieding, Berenberg's chief economist.

Consumer price and wage inflation are far lower in the euro zone than in the US.

Fiscal policy is also far less expansionary.

However, the ECB will not be able to escape the general trend either.

How are things going in the UK and Singapore?

In the UK, meanwhile, a key rate hike is likely this year. The majority of analysts and investors in the markets are now assuming that the central bank will raise the key interest rate in December, which was lowered to 0.1 percent at the beginning of the Corona crisis. In view of the steep rise in inflation, the markets are assuming that monetary policy will be tightened. The majority now expect an interest rate hike to 0.25 percent in December, which will be followed by further interest rate hikes next year.

Michael Saunders, a well-known member of the Bank of England's (BoE) Monetary Policy Committee, said in a recent interview: "I think it is appropriate for markets to move and price in a tightening path significantly earlier than before." Saunders had this summer Voted for an earlier end to the BoE's bond purchases, but remained in a minority position. The rate of inflation in Great Britain rose to 3.2 percent in August. While the Bank of England's forecast is still from a high of around 4 percent, more and more economists see an increase to 5 percent at the beginning of next year as likely. The economist Silvana Tenreyro takes the opposite view of Saunders. A rate hike could be counterproductive, Tenreyro warned on Thursday,who is one of the "doves" in the BoE Monetary Policy Committee.

The central bank of the Southeast Asian financial center Singapore tightened its monetary policy for the first time in three years. It follows countries like New Zealand and South Korea, both of which had raised their key interest rates by 25 basis points each. The main reason for this is the fear of rising inflation, while the city-state is rapidly opening up to travel. The inflation rate is currently 2.4 percent. "The external and internal cost pressures are growing and reflect both the normalization of demand and the tense supply situation," said the Monetary Authority of Singapore (MAS) on Thursday. It controls monetary policy through the exchange rate. The Singapore dollar is held against an - unnamed - basket of currencies.

The central bankers have now decided to raise the corridor of the possible increase in the external value of the Singapore dollar from zero percent, which will lead to a slight appreciation.

They last took a similar step in October 2018.

At the same time, the wealthy small state published a preliminary growth rate of 6.5 percent in the third quarter.

The Ministry of Trade and Industry expects a recovery of between 6 and 7 percent for the entire year, after Singapore's economic output shrank by 5.4 percent last year.