Inflation and yield Monetary policy

Central banks to stay loose

The ECB concluded its policy meeting with the following main policy points.

  1. Policy rate was unchanged with future tend toward no change or even lower rates. Future rate change upward, if happens, would depend on a) over of pandemic, b) inflation sufficiently close to 2% and c) consistent convergency of inflation dynamics.
  2. Continue asset purchase at least until end of March 2022. The pace of asset purchase will increase significantly over the next few months. a) make asset purchase more flexible in terms of time and financial condition, asset types and among jurisdictions. b) continue to reinvest principle payment from maturing securities until at least end of 2023, which implies policy rate increase will not happen until 2024.

The ECB is also in view that the current inflation dynamics is transitory and expect the inflation to return to below 2% early next year. The thinking is in line with Fed and the Bank of Canada.

The Bank of Canada maintained its policy rate yesterday, pausing its course of tightening that started at its last policy meeting and hinted no rate increase until early 2022.

Though we are experiencing pricy food and other consumables when the pandemic subsides and the economy opens, the central banks are not expecting to change its policy rate to taper inflation. I think the current inflation is not primarily due to loose monetary policies and hence the central banks will be hesitate to respond. I also think high inflation is the result of the pandemic and that is the price the society has to pay collectively, by lowering the purchase power of our money and by facilitating payment of the debts that the government owns. From investment perspective, people are trying to recoup those burdens from gains in housing and equity market. For that reason, I think the stock prices will keep going higher this year, maybe 20% more in the remaining year for all three major US stock indexes.

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