Central banks' exit from the extraordinary monetary stimulus is gaining momentum, but is occurring at varying speeds, in contrast with their highly synchronized easing in response to the COVID crisis. This reflects different reaction functions, as well as differences in the challenges individual economies face.
In the US, fading stimulus, supply shortages, and the Delta variant caused a sharp slowing in final demand. We see signs the soft patch may already be ending. The re-nomination of Fed Chair Powell remains our most likely outcome.
In the euro area, while we expect inflation to increase further, talk of stagflation seems off the mark, as Q3 real GDP should indicate solid growth. We expect the ECB president to push back against the market pricing of rates hikes in 2022.
In the UK, we now expect the Bank of England to hike by 15 basis points in December, and by a further 25 basis points in both February and May. At next week's budget, we do not expect the Chancellor to meaningfully alter the already restrictive policy mix. October survey data speak to the unevenness of the recovery.
In Japan, mounting inflationary pressure is spurring moves to tighten monetary policy – however, the pass-through is limited. Fiscal pressures could also encourage the Bank of Japan to stand pat, widening monetary policy divergence with the US and Europe.
In China, September activity data confirmed a rapidly cooling housing market, persistent weakness in household consumption, and moderation in industrial production amid power shortages. We lower our Q4 and Q1 growth forecasts, but see reduced probability of a triple-R cut in the near term. Next week, the quarterly Politburo meeting will be in focus.
Emerging Asia continues to echo the divergence in global central banks. Bank Indonesia stayed on hold this week, saying its stance is “accommodative.” On the other hand, the Bank of Korea is likely to hike in November if next week’s Q3 GDP print confirms the bank's growth outlook. We expect a higher fiscal deficit from Malaysia.
In Emerging EMEA, concerns about the inflation outlook continue to dominate headlines as central banks deliver more hikes and/or sound more hawkish — except for Turkey. While we expect the CBR and the NBH to continue their hiking cycles with 50 basis points and 15 basis points respectively, we expect one last 100 basis point cut from the CBT in November.
In Latin America, we expect monetary tightening to accelerate due to persistent inflationary pressures and a significant fiscal deterioration in Brazil. Next week, central banks could hike 150 basis points in Brazil and 50 basis points in Colombia. We also recently revised our call on Mexico to a hike of 50 basis points in November.
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