LONDON (Reuters – Thursday’s announcement by the European Central Bank that it would end stimuli in the third-quarter of 2022 shows how policymakers around the world are still laser-focused upon inflation rather than potential growth due to the Russia crisis.

Russia’s February 24 invasion of Ukraine has caused a reversal in central bank policies. They were originally determined to dial back post-pandemic stimulus but have now seen oil prices soar up to 14 years highs. That is dampening prospects for growth.

Despite the ECB’s hawkish surprise, it is clear that central banks intend to push ahead with rate-hike programs. But most acknowledge events in Ukraine call for caution.

This is where the policymakers are at on how to get out of stimulus that was caused by pandemics. It’s been ranked according to hawkishness.

Graphic: Central bank balance sheets about to get a touch smaller: https://fingfx.thomsonreuters.com/gfx/mkt/klpykbllrpg/CBANKBALANCESHEET.PNG

1) NORWAY

Norway began its rate liftoff in September, and raised its key rates in December to 0.5%.

Norges Bank expects to increase their rates again in March. Nordea is expecting four rate rises in the coming year.

Graphic: Rates lift-off is underway: https://fingfx.thomsonreuters.com/gfx/mkt/zjvqkoglnvx/RATES1003.PNG

2) NEW ZEALAND

The Reserve Bank of New Zealand increased its key rate to 1% last month by 25 basis points and predicted a stronger peak during the tightening cycle.

The central bank has stated that more needs to be done in order to manage inflation, and it is too early to evaluate the effect of Russia’s invasion on policies. This reminds us that we are among the most hawkish developed country.

The markets are optimistic about a 0.5% rise in April and anticipate rates reaching 2.75% at year’s end.

Graphic: New Zealand’s key rate rises to 1%: https://fingfx.thomsonreuters.com/gfx/mkt/zgvomzwdevd/NZrates.PNG

3) BRITAIN

Next week, the Bank of England will meet and raise rates 25bps to 0.755%. It has already started its tightening cycle in December and February with increases of 0.25% and 1.35%.

Inflation would be exacerbated by rising oil prices and encourage investors not to back tighter policies. This is because policymakers want to prove they can control the cost-of living crisis.

The BoE has to weigh the impact of the Ukraine war on the commodities price and the potential economic damage. Markets do not expect an increase in rates by 0.5% next Thursday. They still expect rates to rise to 2% before the year’s end.

Graphic: UK inflation surge: https://fingfx.thomsonreuters.com/gfx/mkt/byvrjeowwve/UKINFLATION.PNG

4) UNITED STATES

A half-point U.S. rate increase is not possible in March due to uncertainty around the Ukraine conflict.

Jerome Powell, the Federal Reserve Chief, has promised to start increasing rates “carefully”. This means that a move of 25 bps was possible at the March 16th meeting.

Powell described Russia’s invasion as “a game changer”, with unpredictable consequences. But, Powell also stressed that the Fed will continue to be aggressive if inflation doesn’t cool down as rapidly as it is expected.

Graphic: Oil prices and US inflation expectations: https://fingfx.thomsonreuters.com/gfx/mkt/egvbkqewbpq/oil0903.PNG

CANADA – 5)

March 2nd, Bank of Canada raised the key rate one quarter of a point to 0.5%. This was the first rate hike since October 2018.

The BoC isn’t likely to be influenced by global uncertainties in its fight to control inflation, which has been at an all-time high for 30 years. Tiff Macklem, chief of the BoC, says that there’s “considerable room” to raise rates in this year. He doesn’t rule out an increase of 50 basis points.

GRAPHIC: Canada hikes interest rates: https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrlynnvm/CANADA0903.PNG

6) AUSTRALIA

Last week, the Reserve Bank of Australia maintained rates at 0.1%, setting a new record.

The RBA is restraining expectations of an early rate increase after it ended its bond-buying program last month. The war has cemented its dovish attitude, even though it is experiencing a faster economy than expected.

EURO ZONE (7)

The ECB intends to stop asset purchases by the end of the third quarter. It is also accelerating its exit form extraordinary stimulus. In 2022, it had predicted that inflation would average 5.1%, which was more than twice its goal.

Russia’s conflict will have a material impact on the economy. The ECB stated that interest rate adjustments would occur “sometime” after asset purchases are completed. The ECB stated that they will be made “gradually”.

Markets are willing to accept 40 basis points of tightening per year-end. This is equal to four 10-bps rises.

Graphic: Russia’s attack on Ukraine a headwind for Europe: https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrlqogpm/banks0803.PNG

SWEDEN

Sweden had planned a rate increase for the late 2024, but Riksbank minutes showed that several policymakers disagreed with this decision. Anna Breman (Deputy Governor) was also a supporter of rate rises.

1.5% core inflation in January undermined the claim that energy is the primary driver of price rises. Markets expect rate increases to begin well before 2024, and the bank might agree to reduce its balance sheet in April.

JAPAN

Inflation could be pushed towards Bank of Japan’s 2% target by higher commodity prices, but Governor Haruhikokuroda is not planning to tighten monetary policy in order to combat any inflation caused by fuel cost increases.

As more central banks around the BOJ see rate increases, its dovish attitude already renders it an exception.

Graphic: Japan assets: https://fingfx.thomsonreuters.com/gfx/mkt/gkplgakonvb/Japanassets.JPG

10) SWITZERLAND

Swiss National Bank continues to remain at the more dovish end, considering its position appropriate in light of inflation exceeding 2.2% February (the highest rate since 2008).

Since January 2015, the SNB had scrapped the currency peg to make it more attractive for safety-seeking investors.

The franc’s strength is helping to contain inflation but the speed of the move causes unease. On Monday, the SNB made an unusual verbal intervention regarding the Franc.

Graphic:CHF intervention: https://fingfx.thomsonreuters.com/gfx/mkt/mypmnxyeevr/chfintervention.JPG