Daily Commentary BY THE CURVE TEAM –

Central Banks Persistent

29th of January, 2021

Despite the changing outlook for inflation central banks in the developed world are sticking to the line of accommodative monetary policy.

The Fed overnight continued its policy line of being adamant monetary policy will remain accommodative for an extended period. This is the same as the RBA and numerous central banks in the developed world, namely the Bank of England, European Central Bank and Bank of New Zealand.

This is in spite of the inflation outlook improving. The demand side is expected to pick up with income levels high in the economy and the economy re-opening.

Supply side constraints could also contribute to inflation. Covid and trade tensions are still disrupting supply chains.

Demand side inflation will no doubt be what central banks will pay more attention to in terms of determining policy as this is more relevant to employment and wage price inflation. But nonetheless, if supply side inflation drives prices higher in tandem with demand-side inflation then there will be increasing pressure for central banks to ease policy earlier than they would like.

It is still unlikely this scenario will eventuate. Although the inflation outlook is improving, market pricing still implies it will not exceed 3% over 5 years in the US and Australia. Unemployment will also take time to recover.

However, should inflation pick up earlier than expected and before employment recovers, then it will be a true test of central bank’s forward guidance.

Josh Stewart

Associate - Money Markets