The second half of summer has seen its share of data disappointments while rising COVID cases add another layer of concern, but central banks appear to be taking these developments in stride. Fed Chair Powell didn’t make waves with his late-August speech at Jackson Hole but he continued to guide markets toward a 2021 taper. Even with a lacklustre jobs report since then, we think the Fed has enough evidence of labour market recovery to begin easing off the QE pedal later this year. Australia’s lockdowns failed to deter the RBA from tapering its asset purchases in September, with the central bank saying the Delta outbreak will \u201cdelay, but not derail the recovery.” The Bank of Canada didn’t sound overly concerned about unexpected GDP declines, saying it continues to expect the recovery will strengthen over the second half of the year. Another month of solid job growth in August seemed to support that view. The ECB also announced it would slow its bond buying in September, while the BoE is on track to finish its QE purchases by year end.<\/p>\n
While policymakers aren’t overreacting to a few data points, we’re seeing strong enough headwinds to mark down our growth forecasts in Canada and the US. Supply chain issues, labour shortages and mismatches, and in some cases delayed reopening due to the Delta variant are making it difficult to sustain the recovery’s brisk early pace. But we agree with the general message from central banks\u2014these factors won’t derail the recovery. We continue to expect modest rate hikes from the Fed, BoC and BoE next year, while the ECB and RBA aren’t as close to liftoff and will continue with dialed-back QE in 2022. Our base case is for gradual policy tightening with financial conditions remaining broadly accommodative over our forecast horizon. But central banks will be data dependent, and elevated inflation rates and uncertainty about the persistence of price pressures continues to raise the risk that interest rates will have to rise faster than many anticipate.<\/p>\n