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Metzler Outlook 2022: Central Banks Caught Between Inflation Concerns and Waning Growth Momentum

  • Economy: curtailment of loose monetary policy still barely in sight
  • Bonds: central banks will continue to keep yields in check in 2022
  • Forex market: the euro with a slight advantage versus the US dollar
  • Commodities: still room for improvement – despite highs in 2021

Economy: curtailment of loose monetary policy still barely in sight

The Covid-19 pandemic, sustained higher prices and persistent supply chain issues will continue to dominate economic activity in 2022. At the same time, monetary policy is likely to remain loose. "The unprecedented wave of excess liquidity will continue. And as we know, liquidity makes all boats float," says Eugen Keller, Financial Analyst at Metzler Capital Markets. The consequence of loose monetary policy: market developments will continue to run a relatively stable course – short-term corrections not excluded.

In the upcoming year, the markets are likely to focus on inflation – a criteria for which it’s too early to announce an all-clear. There is no doubt that the central banks are stuck between a rock and a hard place here. Should monetary policy focus on price increases or on a possible slowdown in economic growth? For 2022, Metzler analysts assume that concerns about economic growth will outweigh inflation worries, and they therefore expect monetary policy to remain loose in the USA and the euro zone – even if the Fed takes first small steps toward a more restrictive monetary policy stance. The European Central Bank (ECB) is unlikely to change its monetary policy stance much for the time being. The global economy should gradually recover starting in spring of 2022 after another hard Covid-19 winter. For the USA, analysts expect a gain of 3.6 percent. The economy in the euro zone, with growth of 4 percent, and in Germany, with growth of 3.8 percent, will develop more weakly than forecast by the consensus. The high level of new Covid-19 infections and supply chain bottlenecks are likely to have a negative impact, and Metzler analysts do not expect the economy to return to normal until early summer. For China, they expect further deterioration of the economic outlook. The consistent policy of debt reduction introduced in 2021 will cause the real estate market to contract, and this will continue to burden growth in China. Thus, Metzler experts expect growth to increase by only 4.2 percent.

Bonds: central banks will continue to keep yields in check in 2022

According to Sebastian Sachs, fixed income and foreign exchange expert at Metzler Capital Markets, the major central banks are likely to change their restrictive monetary policy only slightly if at all in 2022. The ongoing strained Covid-19 situation will give the already very cautious central banks enough arguments to continue providing the markets with plenty of cheap money in the upcoming year. Growth above potential and sharply rising inflation rates on both sides of the Atlantic are not likely to have much impact on this.


For ten-year US Treasuries, Sachs expects a yield of just over 2 percent by the end of 2022. For ten-year German Bunds, yields will hover closely around the zero mark. Here, Sachs sees a temporary high of 0.2 percent in the third quarter, but a collapse to 0.0 percent by the end of the year. The ECB's pandemic-related PEPP purchasing scheme will expire at the end of March 2022, but Sachs assumes that the volumes eliminated will be replaced by increasing the Asset Purchase Program (APP) or launching a new program. He believes about EUR 50 billion in monthly purchases will be conceivable. In addition, the ECB will have to take the spreads of bonds issued by peripheral countries versus German Bunds into account. The economic situation in countries like Italy and Spain is not yet solid enough to withstand a significantly more restrictive monetary policy by the ECB.

Forex market: the euro with a slight advantage versus the US dollar

On the forex market, Metzler experts also see very narrow ranges in 2022 and believe that the recent Covid-19-related volatilities are unlikely to last. In a rather unspectacular duel between the euro and the US dollar, the euro ultimately has the top hand. The Japanese yen will probably remain at the bottom of the performance list next year, especially since it lacks support. In general, the development of currencies remains closely linked to the respective monetary policy stance. "If a central bank becomes more restrictive, the currency generally benefits – and vice versa," says currency expert Eugen Keller. However, since Metzler experts doubt the interest rate steps priced in for the US, this should mean recovery potential for the euro.

Commodities: still room for improvement – despite highs in 2021

For commodities, despite the highs this year, there is still room for improvement in 2022, especially for energy sources. The Bloomberg Commodity Index should be able to move into the 100-110 point range if the economic upturn continues. The oil market will remain tense, which should support prices in the medium term. In the long term, expansion of oil production can be expected. On average, the price of Brent crude is likely to settle at around 80 USD/barrel in 2022.

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