Interest Rates Forecasts Table of Contents

What-to-expect-from-Global-Interest-Rates-in-2021

Expected Interest Rate Decisions in 2021

The Federal Reserve will do everything to boost the US economy and push it to the recovery path from the coronavirus pandemic.
The Fed has said it will hold rates near zero through at least 2023.

The central bank promised to keep buying bonds at a monthly pace of at least $120 billion.

It also plans to do so until they reach the targets for maximum employment and 2% inflation.

Such approach allows expecting a year of the weak USD.

How will central banks spend 2021? They will try to maintain their ultra-easy and accommodative monetary policies even as the global economy recovers and runs away from last year’s recession caused by the coronavirus.

The goal of central bankers this year is to ensure that the recovery is safe and sustainable before even thinking about tightening policy.

Continuing uncertainty over the virus, high unemployment, and weak inflation are the main reasons for waiting According to Bloomberg’s quarterly review of monetary policy, no major central bank is expected to hike interest rates this year.

China, India, Russia, and Mexico may also cut benchmark rates further.

Only Argentina and Nigeria are expected to raise rates in 2021.

Here is a guide for interest rates in 2021 and Bloomberg’ quarterly guide.

1. US Federal Reserve

Bloomberg's Forecasts on US Federal Reserve's Interest Rate

Current federal funds rate is 0.25% and Bloomberg Economics’ forecast for end of 2021 is 0.25%.

Current Situation of US Federal Reserve’s Interest Rate

The Federal Reserve enters 2021 with determination to do everything in its power to help the US economy to recover from the devastating consequences of the coronavirus.

It has no intention of slowing down until everything is stable.

Even with Fed Chairman Jerome Powell declaring that he can “see the light at the end of the tunnel” with the rollout of the vaccines, he stressed that the Fed wouldn’t rush and was in no hurry to withdraw support and stimulus from the markets.

The Fed has announced that it will keep interest rates near zero until at least 2023.

It has pledged to continue buying bonds at a monthly rate of no less than $120 billion until “substantial further progress” is made in achieving the bank’s two main targets: maximum employment and 2% inflation.

Bloomberg’s Forecasts on US Federal Reserve’s Interest Rate

The Fed’s efforts to adopt more qualitative guidance on the interest rate and the asset-purchase program shouldn’t be construed as evidence that policymakers are moving towards easing and easing accommodation.

Rather, they are trying to avoid a new 2013 Taper Tantrum, when the Fed announced future tapering of its quantitative easing and reducing the pace of its purchases of Treasury bonds.

The US economy is preparing for a strong recovery in 2021, especially in the second half of the year.

However, Bloomberg doesn’t expect the quantitative easing program to be scaled back until 2022, making the nearest possibility for a rate hike to be 2025.

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2. European Central Bank

Bloomberg's Forecasts on European Central Bank's Interest Rate

Current federal funds rate is -0.5 and Bloomberg Economics’ forecast for end of 2021 is -0.5.

Current Situation of European Central Bank’s Interest Rate

The ECB increased its emergency bond-buying program to 1.85 trillion euros ($2.3 trillion) in December and decided to extend it until March 2022.

It is worth mentioning that the 500-billion-euro additional boost won wide-support in the Governing Council only because of President Christine Lagarde’s promise that not this entire amount will be necessary.

This promise and potential reduction in bond purchases depend on the pandemic’s developments.

Although the start of vaccination is positive for future economic outlook, the unprecedented surge in infections and the return of lockdowns in Britain and elsewhere affect the scene in the short term.

Bloomberg’s Forecasts on European Central Bank’s Interest Rate

The ECB’s primary tool for fighting the economic devastation caused by covid-19 is the Pandemic Emergency Purchase Program.

Its maximum power is now 1.85 trillion euro.

Bloomberg expects the purchase to continue until the end of 2021, at 20 billion euro per month.

The Governing Council will continue to provide liquidity through its targeted longer-term refinancing operations at an interest rate that could be as low as -1%.

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3. Bank of England

Bloomberg's Forecasts on Bank of England's Interest Rate

Current federal funds rate is 0.1% and Bloomberg Economics’ forecast for end of 2021 is 0.1%.

Current Situation of Bank of England’s Interest Rate

Bank of England Governor Andrew Bailey insists that the BoE still has many tools up its sleeve, including cutting rates further and accelerating or increasing the bond-buying program.

Bailey may become the first-ever Governor of the British central bank to take interest rates into negative territory and below zero.

The bank’s upcoming policies will depend on how the UK’s economy, already affected by the coronavirus, will handle life outside the European Union after the Brexit transition period ended on December 31, 2020.

Bloomberg’s Forecasts on Bank of England’s Interest Rate

The BoE tone was cautiously optimistic about the outlook.

Bloomberg believes that the central bank will keep rates unchanged in 2021, but that doesn’t mean that it will be a boring year for the BoE.

The bank is likely to formally introduce negative interest rates into its toolkit by reducing its estimate of a lower bound.

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4. Bank of Japan

Bloomberg's Forecasts on Bank of Japan's Interest Rate

Current federal funds rate is -0.1% Bloomberg Economics’ forecast for end of 2021 is -0.1%.

Current Situation of Bank of Japan’s Interest Rate

The Bank of Japan is expected to hold key interest rates unchanged through 2021 after adjusting and fine-tuning its stimulus in 2020.

The bank called for a review of the policies to search for ways to reduce the side effects of the yield curve control policy and improve its effectiveness.

The pandemic’s path remains the greatest uncertainty challenging the Japanese economy.

However, with vaccination spreading widely in the first half of the year and the Olympic Games taking place, the BOJ monitors will closely follow to see if it is able to ease its covid-19 support measures around September.

Bloomberg’s Forecasts on Bank of Japan’s Interest Rate

The BOJ should continue supporting the corporate sector to keep risks to the economy in check.

Bloomberg expects the BoJ to extend the temporary boosts in ceilings on its purchases of ETFs and REITs beyond the March 2021 expiry.

This decision is likely to come at its next meeting in January.

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5. Bank of Canada

Bloomberg's Forecasts on Bank of Canada's Interest Rate

Current federal funds rate is 0.25% and Bloomberg Economics’ forecast for end of 2021 is 0.25%.

Current Situation of Bank of Canada’s Interest Rate

The Bank of Canada won’t raise its overnight rate this year even if the economy recovers.

Governor Tiff Macklem has pledged to keep rates at the current 0.25% level until 2023.

The bank will update its forecast later this month.

The Bank of Canada’s focus in 2021 will be on the mountain of government debt the central bank has been buying.

The bank is expected to start scaling back purchases as a first step in withdrawing the stimulus.

The Bank of Canada’s quantitative easing program is one of the most aggressive anywhere in 2020.

The Canadian central bank won’t increase its bond purchases as the first defense line if things went bad unexpectedly.

If more stimulus is needed, the bank will look first for other tools – such as further rate cuts or a yield curve control.

Bloomberg’s Forecasts on Bank of Canada’s Interest Rate

The Bank of Canada will monitor financial conditions as the economy enters a tougher phase this winter.

However, unless the lockdown restrictions trigger a market shock or the vaccine rollout results disappoint, the Bank of Canada is likely to hold asset purchases at a lower level in mid-2021 while adding further stimulus.

The BOC won’t consider changing forward guidance on a rate hold into 2023 until late in the year, and only if growth increases more than expected in the summer of 2021.

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6. Reserve Bank of Australia

Bloomberg's Forecasts on Reserve Bank of Australia

Current federal funds rate is 0.1% and Bloomberg Economics’ forecast for end of 2021 is 0.1%.

Current Situation of Reserve Bank of Australia’s Interest Rate

With the domestic economy recovering at a faster rate than expected, we don’t think the RBA will increase the stimulus through 2021.

That will make us focus on the quantitative easing (QE) program and whether the bank will extend it beyond its current 6-month run.

The bank resorted to QE to control the persistent rally of the Australian dollar.

If the Australian dollar continues to rise as the labor market recovers, iron ore prices remain high, and consumer spending increases, the RBA is likely to continue the buying of longer-dated bonds beyond April.

Bloomberg’s Forecasts on Reserve Bank of Australia

With the domestic economy recovering at a faster rate than expected, we don’t think the RBA will increase the stimulus through 2021.

That will make us focus on the quantitative easing (QE) program and whether the bank will extend it beyond its current 6-month run.

The bank resorted to QE to control the persistent rally of the Australian dollar.

If the Australian dollar continues to rise as the labor market recovers, iron ore prices remain high, and consumer spending increases, the RBA is likely to continue the buying of longer-dated bonds beyond April.

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7. Reserve Bank of New Zealand

Bloomberg's Forecasts on Reserve Bank of New Zealand

Current federal funds rate: 0.25%,, Bloomberg Economics’ forecast for end of 2021: 0’%.

Current Situation of Reserve Bank of New Zealand’s Interest Rate

The New Zealand economy witnessed a V-shaped recovery from the recession, with the help of the country’s successful containment plan of coronavirus, so investors removed all bets that the RBNZ would cut rates to negative territory in 2021.

Instead, their focus shifted to the booming property market, which highlighted the potential risks of record-low borrowing costs.

Bloomberg’s Forecasts on Reserve Bank of New Zealand

Rising house prices may complicate the RBNZ’s options, but it won’t fully restrict it from delivering further easing through 2021.

Negative rates are risky but relatively weak.

Most likely, the bank will move towards additional quantitative easing.

Bloomberg believes that the RBNZ will boost the Funding for Lending program and its asset purchases more.

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