Strong inflation prints, ongoing supply chain bottlenecks, labour shortages, and further increases in commodity prices continued to stoke inflation concerns in October. Short-term yields rose sharply as investors bet central banks will have to raise rates sooner and faster if they are going to be able to rein in inflation. For their part, policymakers stuck to the view that current price pressures will fade over time though they stand ready to act if that doesn\u2019t prove to be the case. We think the key question shaping up for 2022 is, can central banks continue to hold rates low until economies fully recover, or will inflation concerns force them to act more conventionally and raise rates in advance?<\/p>\n
The BoE certainly appears to be in the latter camp, indicating rate increases are likely in the coming months after a close call not to raise rates in November. We now look for hikes in December and February but think market pricing for Bank Rate to hit 1% by the end of next year looks too high. The BoC has committed to not raising rates until economic slack is absorbed but arguably wavered on that in October when it opened the door to earlier hikes despite downgrading its growth projections. We now look for three rate increases in 2022 beginning in April\u2014again not as aggressive as markets are pricing. The Fed continued to emphasize it wants to achieve maximum employment before raising fed funds but received plenty of questions on how it would handle conflicting inflation and employment objectives.<\/p>\n
Markets are pricing in rate hike next year by the ECB and RBA though we don\u2019t expect a move from either at this stage as they reduce QE programs in 2022. Markets have easily digested tapering announcements by other central banks with yield curves generally flattening as higher policy rates are seen capping inflation and slowing medium-term growth.\n<\/p>\n