Published on Tuesday, December 21, 2021

Europe | Exit: the huge challenge

The central banks of the major developed economies will be closely monitored as they are heading for the exit strategy, i.e. the unwinding of the massive monetary stimulus rolled out during the COVID-19 crisis. The challenge is huge because of a combination of three elements.

Key points

  • Key points:
  • First, this is not a typical recovery. The downturn caused by the pandemic has been totally different from the previous ones and, beyond the rapid rebound in activity, the cyclical effects have not yet faded. Bottlenecks are just an example of this.
  • Secondly, there is uncertainty about the structural changes derived from the pandemic. We still have limited knowledge about how savings and investment decisions, labor supply and demand, trade and financial flows will be affected, and about how these changes could shape the economic landscape.
  • And, thirdly, there is the added difficulty that central banks will have to test their new strategies in a context of strong upward pressure on inflation.
  • Central banks have taken action. The Fed is speeding up the “tapering” of stimulus and hints at rate hikes following shortly after. The Fed could raise rates up to three times next year and will continue to do so in 2023, perhaps more aggressively.
  • The ECB is also looking toward the exit: it is set to end its emergency program in March. While it will keep up the conventional purchase program at least until October, the pace of asset purchases will slow down over the year. In the euro area, with a flatter cyclical situation, lower inflation and no wage pressures, rate hikes will come later.

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