Central banks decided a dramatic shift in stance after a stressful Q4 2018 for both investors and policy makers. An easing bias has taken over the normalisation path as the inflation outlook seems tame and growth momentum has gradually worsened.
A flock of doves
US Federal Reserve (Fed) leads the way The Fed has triggered a global U-turn in monetary policy. After the hike in December 2018 sent the market into a tailspin, Chairman Powell decided to backtrack in early January in favour of patience. Modest US wage growth and core inflation provide justification for such a stance. We forecast only one 25bp hike this year, in December, if inflation picks up.
The Fed also called a halt to the shrinking of its balance sheet, another accommodative shift. The increase to banks’ excess reserves which occurred during the second and third rounds of quantitative easing (QE) will have been removed by year-end.
European Central Bank (ECB) cornered into easing Bank lending has dipped: non-financial corporate loan growth eased to 3.3% in February, from 4.3% five months ago. The weaker outlook led the ECB to downgrade its growth forecast for 2019, from 1.7% to 1.1%. At the same time, the bank announced the forthcoming launch of new targeted long-term refinancing operations (TLTROs) to ease bank funding pressures.
The ECB has followed the Fed’s lead and no longer plans to hike this year, given sharp weakening in activity in the region. We agree.
To infinity, and beyond?
Bank of England (BoE) is Brexit-dependent Monetary policy choices hinge on Brexit. Disorderly transition risk is likely to keep the BoE on hold to mitigate economic fallout. Conversely, if the negotiation period is extended, the bank could be tempted to resume rate hikes.
We hold a nuanced view and now pencil in only one 25bp rate hike in the next 12 months.
Bank of Japan (BoJ) endorses QE infinity The Japanese recovery seems too fragile to withstand the end of QE. Governor Kuroda kept monetary policy unchanged in Q1, with 10-year sovereign yields still near zero. Looking forward, the BoJ is likely to keep policy settings unchanged to preserve a weak yen and mitigate deflation in a context of sluggish global trade and structural headwinds.
People’s Bank of China (PBoC) spreads out rate cuts China recently announced a substantial amount of economic stimulus, in particular fiscal measures. And more monetary easing could be rolled out throughout 2019. We expect extra Reserve Requirement Ratio (RRR) cuts to be delivered over the course of the year to support domestic bank lending.
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