BlackRock Investment Institute

Macro insights

Restart confusion

Recent central bank meetings show policymakers are having difficulty clarifying some of the confusion around their response to the powerful economic restart. We have argued restart dynamics are distinct from a typical business cycle recovery – and supply/demand mismatches would lead to higher inflation. We see major central banks in roughly two groups: those that want to look through restart-driven inflation and are explicitly more tolerant of inflation – the Fed and ECB due to new policy frameworks – and those that are worried about their control over inflation expectations.

Pricing in different lift-offs

Chart showing the path of market interest rate pricing

Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, 3 Nov. 2021. Notes: The chart shows the pricing of expected central bank policy rates via forward overnight index swaps. For example, the 2023 pricing shows where the one-year forward is expected a year from now.

Markets see the latter group following a steeper path of policy rate increases to lean against inflation, with the potential for a policy reversal soon after – see the UK in the chart. What ultimately matters is not the timing of lift-off on policy rates but the cumulative response. Whether deliberate or through an expected reversal of early policy tightening, this policy response is set to be one of the most muted in recent decades – the crux of our new nominal theme.

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Elga Bartsch
Head of Macro Research
Read bio
Nicholas Fawcett
Macro Research

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