Setting the correct policy is now a lot more complicated for Central Banks
When the Covid pandemic triggered a very sudden and deep recession early last year, key central banks threw the proverbial monetary policy kitchen sink at the downturn, with rate cuts and enormous QE bond purchase programmes. Despite a sharp pick-up in inflation this year, central banks have been keen to emphasise their view that the rise will prove to be transitory, and in turn will not warrant a marked tightening of monetary policy.
However, with a sharp rebound in activity taking hold on the back of successful vaccine rollout programmes, speculation over recent months has been on when some of the flow the monetary stimulus may start to be withdrawn. Already this month, we have seen the ECB announce a modest scaling back of bond-buying under its main asset purchase programme.
