Huw Pill last week questioned the appropriateness of QE as a tool to tackle the next bout of market disruption, given elevated rates of inflation globally. Policymakers are gradually acknowledging the limits to QE. Agustín Carstens, General Manager at the BIS, emphasised the limits to monetary and fiscal policy in a speech last week titled The return of inflation, echoing the sentiments of Huw Pill.
The BIS was of course an important defender of the transitory inflation thesis even as recently as September 2021. But the speech by Carstens signals a volte face. He argued that “we may be on the cusp of a new inflationary era”, referring twice to a “change in paradigm”.
The BoJ seems intent on defending its yield cap, but the 1.6% annual average rate of inflation expected over the next five years has diverged significantly from 10-year JGB yields. This will test the BoJ’s resolve, as well as its belief that it still has a fight against deflation on its hands. The yen slid past 125 today. Even Japan may not be immune to the changing inflation environment.
The severity of lockdowns in China is weighing on oil. Chinese stocks fell sharply earlier today. But the US 10-year Treasury yield climbed to 2.782%. Ten-year Bunds sold off, as did Gilts.
The moves higher in 10-year yields could be a function of the impending Federal Reserve balance sheet rundown. But the signalling mechanism by Central Banks is playing an important role here too. The higher r* narrative is gaining traction. Many more voices (c.f., Schnabel) are now coalescing around the view that we may be on the cusp of a material shift higher in real interest rates.
