The Bank of Canada (BoC) has gotten a head-start. It has started to scale back its weekly asset purchases by 25%, a maneuver known as tapering and a hotly discussed topic since the start of the year. While the world plunged into the Covid-crisis more or less simultaneously, the end of crisis management will not be synchronized. Some countries are emerging faster and rebounding more strongly than others for a variety of reasons – from the early success in containing the pandemic and size of fiscal booster shots to the pace of rolling out vaccination programs. After the BoC's decision, the focus quickly shifted to Australia and New Zealand, two early success stories.
Who is next to taper? And why start tapering earlier rather than later? In a speech on March 23, 2021 Toni Gravelle, Deputy Governor of the Bank of Canada, admitted that "by the end of April 2021 Government-of-Canada (GoC) bond holdings are expected to be the largest piece of the balance-sheet asset by far." Whilst this is not unusual per se, purchases stand out by another measure. "Our GoC bond purchases since last March represent a little over 35% of the total amount of GoC bonds that are outstanding." As our Chart of the Week shows, the fraction of government bonds owned by the respective central banks differs quite a bit.
It also suggests that market chatter about the Reserve Bank of Australia (RBA) following suit may be premature. Not only does the RBA hold just 19% of Australia's government bonds, it is less than half the fraction for the BoC. This week's inflation data also showed that an average of 1.2% year on year is well below the RBA's target range of 2% to 3%. By contrast, the BoC is already much closer to its target of 2% on average, with inflation running at about 1.9%.
As for the Reserve Bank of New Zealand (RBNZ), it is already tapering, if only implicitly. The expanded Quantitative-Easing program, that kicked off in March 2020 leaves room of up to 100 billion New Zealand Dollar (NZD) until June 2022. However, so far, the RBNZ has only spent 43 billion NZD. The Bank of England (BoE) will also be in the position to smooth its purchases under its QE program; indeed, it needs to do so in order to remain within its parameters. However, the UK's re-opening only just started, which means it may take a while yet until the inflation data strengthens. In terms of protecting jobs, both the UK and New Zealand have fared even better than Canada.
In the matrix of decision-making parameters central bank's holdings of sovereign bonds should therefore be paid extra attention as they could influence their speed of tapering: the higher the holdings, the more likely it becomes, in our opinion, that the central bank is willing to taper even if inflation numbers themselves would not necessitate it. The BoC has indicated that this has played a role, and it could thus equally play a role for the RBNZ and the BoE.
For currency markets the tapering discussion means rate differentials are – once believed to be a topic no longer relevant – back as drivers. This makes being able to identify which factors could lead to early tapering decisions all the more critical.
1Bank of Japan 2Sveriges riksbank 3Bank of Canada 4Reserve Bank of New Zealand 5Bank of England 6U.S. Federal Reserve 7European Central Bank 8Reserve Bank of Australia
Sources: Bloomberg Finance L.P., Bank of China, Reserve Bank of Australia, Bank of England, UBS Group AG and DWS Investment GmbH as of 4/23/21