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Smaller, open economies like the UK and Canada will tighten policy much more sharply than the Federal Reserve and European Central Bank, which are both years from raising interest rates, a former senior forecaster at the Bank of England and the Bank of Canada told MNI.

The BOE is in something of a "coin toss" between hiking in December or February and rates will climb gradually from there as the UK deals with inflation pressures around energy markets, James Rossiter, a senior economist on the BOE forecasting team from 2012-2013 and now TD's head of global macro strategy, said in an interview.

A wild card is Governor Andrew Bailey, who like his predecessor Mark Carney has been tagged an "unreliable boyfriend" after wrong-footing investors about hiking.

Bailey "in some ways, just doesn't play the game of markets, quite to the same degree that other central bankers have, and I think probably on the communications side, he's still learning lessons when it comes to how markets interpret what he says," Rossiter said by phone from London.

SMALLER ECONOMIES PRICE TAKERS

While inflation in the eurozone will fade early next year as changes in Germany's value-added tax falls out of calculations, and U.S. price gains are focused in categories like energy and cars, central banks in smaller open economies will feel more pressure, he said.

The Bank of Canada will lift its 0.25% policy rate in April, June and July, then take "quite a long pause" to avoid getting too far ahead of the Fed, said Rossiter, who managed the BOC's projection division in 2014 and 2015. Governor Tiff Macklem has said he could hike as soon as April if stable 2% inflation and an economy at potential are restored, and investors betting he will move sooner are miscalculating, Rossiter suggested.

"The December meeting doesn't really give them the output and tools necessary to kind of re-pivot to something like a January hike," he said.

In a world adjusting to Covid, the BOE and the BOC, together with peers in economies like Norway and New Zealand, will tighten first, said Rossiter, adding that in contrast the market was betting on rate hikes in the U.S. and the eurozone far too soon.

"The small open economies are the ones who are rushing for the exits," Rossiter said. "They are price takers in the global economy."

MNI has reported the BOE may be too optimistic about inflation remaining well anchored. (MNI INTERVIEW2: BOE Too Optimistic On Inflation- Mortimer-Lee)

FOMC TILTING MORE DOVISH

U.S. growth and inflation pressure will ease as pandemic spending fades, and the Fed will keep near zero interest rates until late 2023, according to Rossiter, one of the most dovish analysts in the market.

"You've got the Fed basically looking at slowing growth, slowing inflation, tapering just wrapping up and in our view the participation rate in the labor market rising as people get their booster shots," he said. Core PCE inflation could slow to 2% by Q4 2022, he predicts.

Fed personnel changes will also make the FOMC a more dovish, he said. Democratic President Joe Biden on Monday nominated Jerome Powell to continue as Chair and Lael Brainard as a Vice Chair. New regional presidents join the FOMC next year.

The ECB has a long history of weak inflation and will need until 2024 to shift from bond buying to lifting rates, said Rossiter, who saw purchases continuing at about EUR50 billion a month beyond the expiry of the Pandemic Emergency Purchase Programme, with tapering only possible around the end of 2023.

"There's a lot of gravity to eurozone inflation, it likes to live well below 2%," he said. "Eurozone inflation right now at 4.1%, you can explain away half of it with German VAT base effects" and energy prices, meaning inflation is "basically at target" now.