It is all about the QE now…

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Despite growing concerns about the spread of the Delta variant of coronavirus, major global stock indices ended the week near all-time highs. Such a high level of optimism on behalf of investors could be attributed to an astonishing second-quarter earnings season and good macroeconomic data. In the latter case, it should be mentioned that in July the world’s largest economy managed to add 943,000 non-farm payrolls. At the same time, the unemployment rate fell by half a percentage point to 5.4%.

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Likewise, we could say that the fact that central banks continue to maintain very accommodative monetary policies helped. In particular, last week the Bank of England decided to keep its benchmark interest rate at its record low of 0.1%. The asset purchase limit has been kept at £895 billion. Along with that, the central bank noted that it now expects inflation to peak at 4.0% in late 2021 and early 2022, the highest in 10 years.

The Reserve Bank of Australia also decided to leave its monetary policy unchanged, adding that it would not increase interest rates until inflation reaches a “sustainable” level within the 2-3% target range. Along with this, the bank announced its plans to reduce the bond purchase program in September to 4 trillion dollars a week compared to the current 5 trillion.

The ECB, following its monetary policy meeting on July 22, also pledged to keep interest rates at record lows for longer to fuel sluggish inflation. Still, agency official Jens Weidmann said the agency should toughen QE if necessary. The only problem is that during the coronavirus crisis, the countries of the euro zone have increased their indebtedness, which could expose them to an increase in the costs of debt service if the central bank increases interest rates.

In China, however, it appears that the PBOC could be forced to introduce new economic stimulus after a number of cities in the Asian country were forced to reimpose movement restrictions.  including temporary airport closures and travel alerts to the population on internal displacement, due to more than a hundred cases of coronavirus, the highest number in the last six months.

So, the question remains open: what is going to happen when Central Banks begin to taper the QE program…

 

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