Central banks have stepped in with unprecedented levels of support during the Covid-19 pandemic, cutting rates to all-time lows and making use of quantitative easing in ways not seen since the global financial crisis.
However, heading into 2021, EdenTree Investment Management’s David Katimbo-Mugwanya believes that the benefits of ultra-loose monetary policy will likely be minimal compared with fiscal support from governments.
Katimbo-Mugwanya, who oversees the £237.3m EdenTree Amity Sterling Bond fund, said fiscal support – in the form of greater spending – will play a bigger part in economy next year.
He said: “I would say this, at the start of the year, fiscal policy would be handed the baton from monetary policy.”
Loose monetary policy and increased fiscal stimulus can have a major impact on economies and consequentially markets, and this year there have been records amount to try and tackle the impact of the coronavirus.
At the start of the crisis in March, the Bank of England slashed interest rates to 0.1 per cent, their lowest in history and announced more than £600bn in quantitative easing. Last month the Bank announced an additional £150bn in quantitative easing to support the UK economy and has consulted on negative interest rates.
Although the Bank of England has been independent of government since 1997, this year there has been a more coordinated effort to support the economy through the challenges of the coronavirus, something that has been seen in other countries.
Indeed, Federated Hermes’ head of fixed income Andrew Jackson said the co-ordinated response had been one of the “largest silver linings of what we’ve seen in 2020”.
He said: “I think that we’ve proved that in the face of a crisis we can throw a lot of energy and a lot of firepower at this problem.”
This coordinated approach has been one of the few ‘silver linings’ of the pandemic, according to Federated Hermes senior economist Silvia Dall’Angelo.
But the significant “step-up” in fiscal policy could provide a framework to tackle other emergencies in the near future, such as climate change.
But, Katimbo-Mugwanya said that central banks were coming to “the end of their tether” with regards to quantitative easing after more than a decade of it.
“They can print more money definitely, but how much more can they gain out of further QE? And the answer is a lot less,” he said.
Katimbo-Mugwanya said further QE is not going to have the same impact as it necessarily did the first time around after the global financial crisis.
“It has to be more direct stimulus,” he said. “It has to find its way to the economy quicker. Having low rates hasn’t really helped us very much as a real economy you could say for the last five years, if not decade going backwards.
“But what’s been realised is that you have to get money into people’s hands, and you have to do that probably in a fiscal manner, and that’s something which will probably happen more going forward.”
But this doesn’t mean that central banks will be changing their rhetoric, Katimbo-Mugwanya noted.
Central banks will have to uphold the image that they can unleash limitless amounts of stimulus, even if that isn’t the reality, he said.
“The psychology of it is that the market needs to be informed that the central banks have these unlimited capabilities to stimulate markets, whereas in reality there is a limit I would say,” he explained. “They might not say it, but there is a limit.
“I mean they allude to it in the fact that they don’t want to own that much of the gilt stock. Whether they come out and say that is another thing, because the signalling is quite important.”
Federated Hermes’ Jackson agreed with this to some extent, adding that it would be unlikely to see central banks change policies anytime soon and raise rates, “taking back that wall of liquidity which continues to prop up markets”.
Instead, it’s more likely that central banks will continue to signal that they can purchase more assets whenever needed, although that might not be what happens in practice, Katimbo-Mugwanya said.
“In reality I think that you’re probably going to see more fiscal policy,” he said. “Which is why the central banks themselves have been more emboldened to talk towards fiscal policy to tell the government i.e. to tell the governments to up their fiscal response to the crises.”