Opinion 

Central Banks – all change, or no change?

Anthony Willis

Anthony Willis

The past few weeks have seen markets digesting the latest round of central bank meetings and important announcements that will shape the outlook for monetary policy over the next year.

It came as no surprise to see both the Federal Reserve and Bank of Japan remain on hold, and both the European Central Bank and Bank of England telegraphed in advance their respective changes to quantitative easing and increasing interest rates.

The ECB is now set for another 9 months, at least, of bond buying, and has made clear that interest rates will not rise until QE is completed.

The Bank of England achieved the rare feat of tightening policy while talking down the economic outlook, though the UK does face a unique period of uncertainty as we edge closer to Brexit.

Across the pond, the Fed is fully expected to raise rates by a further 0.25 per cent next month, and we know now that Jerome Powell will take over the helm from Janet Yellen early next year.

Mr Powell was the ‘continuity’ candidate for the post, and his appointment leaves investors expecting more of the same: ‘slow and steady’ from the Federal Reserve.

In a client update a few months ago, we wrote about what appeared to be a pending inflection point in the central banks, harbouring some concerns about what this may mean for markets.

Right now however, it does feel a little like we are not seeing a significant shift in policy, or at least markets are acting as if it’s more of the same from the central banks.

With the ECB committed to quantitative easing until next September and the Bank of Japan seemingly stuck with QE in perpetuity, there was
still scope for the Bank of England to take a more hawkish stance to go with their rate rise and the potential for a new, more hawkish person to take the helm at the Federal Reserve.

The Bank of England appears set on a course of extremely limited tightening, which comes as no surprise given the uncertain political breath and economic outlook.

Meanwhile, for the moment at least, the Fed is set for policy continuity under Mr Powell, though it is clear that investors will hang on his every word in the coming weeks for hints of any change in future policy.

One of the few (known) risks we thought could disrupt markets – central bank change – has therefore diminished for the moment given we have relative certainty on the policy outlook.

The age of easy money may be coming to an end, but it’s not over yet, and monetary policy looks set to be in a new lower range in line with the lower growth and inflation environment expected over the medium to long term.

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