Three Major World Central Banks had Policy Meetings Last Week: Here's the Recap

More than expected hawkish Fed, BoE the first to hike rates after pandemic and ECB reducing stimulus, were the highlights of the most important events last week

The policy meetings of the three major world central banks in past two days were the top events in the financial world last week.

The final meetings in 2021 brought some surprises from the policymakers, while some decisions were in line with expectations.

The US Federal Reserve was the first in a row, expressing more than expected hawkish stance by speeding up the stimulus reduction and signaling more aggressive approach in 2022, the Bank of England surprised my 0.15% rate hike, being the first to start tightening pandemic-lead ultra-loose monetary policy, while the European Central Bank was the most dovish by reducing the support to the economy, but signaling it will continue to help in 2022.

The decisions leave the world's two biggest central banks on opposite courses and signal widening divergence between two policies after the Fed accelerated its exit from asset purchases and flagged several rate hikes, while the ECB’s action was milder, raising concerns as similar divergences have led to market turbulence in the past.

The US Federal Reserve

The US Federal Reserve, in its last policy meeting this year, announced it will double the pace at which it is scaling back bond purchases to $30 billion per month, expecting to end the program by March 2022, earlier than initially planned program’s mid-year end.

The central bank also signaled it will raise interest rates three times by 25 basis points in 2022, surprising wide expectations for two hikes next year, after holding borrowing costs near zero since March 2020, when measure was imposed to battle strong impact of coronavirus pandemic.

The decision, which proves to be one of the most hawkish in years, shows that the Fed intensified the battle against the hottest inflation in decades.

Fed chair Jerome Powell was upbeat on economic activity and recovery in labor market, in the press conference after the FOMC announced its decision, saying the economy has been making rapid progress toward maximum employment that fulfills central bank’s major requirements to start tightening the monetary policy.

Powell said that policymakers eventually expect a gradual rate of policy firming, but they don’t anticipate raising rates before ending the taper process, though could hike before reaching full employment.

The central bank shows its readiness to fight rising price pressures, even as the pandemic poses an ongoing challenge to the economic recovery, highlighting concerns over the new Omicron variant which continues to pose risk to the economic outlook.

The new rate projections marks a major shift from the last time forecasts were updated in September, when officials were evenly split on the need for any rate increases at all in 2022.
The new projections also showed policy makers see another three increases as appropriate in 2023 and two more in 2024, bringing the funds rate to 2.1% by the end of that year.

Economists see more panic than patience in Fed’s message that the policymakers are serious about controlling inflation and willing to hike rates faster and higher, signaling that the US central bank is chasing inflation Inflation Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is m Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is m Read this Term for the first time in decades.

Bank of England

The Bank of England raised interest rates by 15 basis points to 0.25% in its last policy meeting this year, being the first of the world’s central banks to increase interest rates after coronavirus pandemic.

The nine-member MPC voted by 8-1 to raise interest rate in December’s policy meeting.

Surging inflation raised pressure on the central bank to start tightening monetary policy after keeping ultra-low rates for more than 1 ½ year during the coronavirus pandemic which hammered the global economy, as the BoE expect consumer prices to hit 6% next April, three times of its 2% target level.

The decision surprised forecasts as most of economists expected the Monetary Policy Committee to keep the rates unchanged, as health conditions in the Britain started to worsen on surge of coronavirus cases and new Omicron variant.

The BoE said that its Monetary Policy Committee continues to judge the risks around the inflation in the medium term, with some modest tightening of monetary policy is likely to be necessary to meet the 2% inflation target sustainably.

The BoE also pointed to the likelihood of further rate hikes ahead, as investors were fully pricing in another rate hike to 0.5% by March, with expectations that rates would rise to 1% by September.

Spread of new Omicron virus caused the central bank to cut its growth forecasts for December and the first quarter of 2022, though the decision to increase rates was made even that BoE did not know about the full extent of the economic damage caused by surging Omicron variant of virus.

The MPC voted 9-0 to keep the BoE's government bond-buying programme at its target size of 875 billion pounds, while the BoE has also bought 20 billion pounds of corporate bonds.

The European Central Bank

The European Central Bank European Central Bank The European Central Bank (ECB) represents the central banking entity in the Eurozone that oversees monetary policy for the bloc. As a growing geographic and economic region, the eurozone now includes 19 countries, which rely on the euro as their national currency.The eurozone presently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.In terms of monetary The European Central Bank (ECB) represents the central banking entity in the Eurozone that oversees monetary policy for the bloc. As a growing geographic and economic region, the eurozone now includes 19 countries, which rely on the euro as their national currency.The eurozone presently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.In terms of monetary Read this Term further cut support for the euro zone economy in its last meeting this year but promised that support will continue through 2022.
The ECB confirmed that its view on surging inflation remains relaxed, signaling that an exit from its current ultra-easy policy would be slow.

The ECB announced it will cut bond purchases under its euro 1.85 trillion Pandemic Emergency Purchase Programme (PEPP) next quarter and will relax the scheme next March.

But the central bank will increase bond buys under the longer-running Asset Purchase Program (APP), doubling them to 40 billion euros under the program in the second quarter and then reduce it to 30 billion euros in the third quarter.

From the last quarter of 2022 onwards, purchases will be maintained at 20 billion euros, for as long as necessary, to reinforce the accommodative impact of the ECB's policy rates.

The pressure on the central bank to follow its global peers in reducing a massive pumping of money into the economy is rising, as the bloc’s economy recovered and returned to its pre-pandemic size.
But policymakers remain cautious, as too quick stimulus reduction could hurt efforts to revive once-anemic inflation, while the emergence of the fast-spreading new Omicron variant of coronavirus could lead to new restrictions that would risk new headwinds for the economy.

The ECB President Christine Lagarde pointed to fresh uncertainty over new coronavirus variant and its possible impact on various sectors of the economy, adding that global supply chain problems would persist for some time and continue to hurt the economic recovery, but expects them to ease some time next year.

The European Central Bank also raised its inflation projections, expecting inflation to remain above its 2% target for the rest of 2021 and in 2022, but expecting it to return below the target in the following two years, that comes in line with its view that the current high inflation will last longer than expected but still viewing it transitory.