Central bank policy shifting but only slowly - NAB

Reflecting the ongoing growth in the global economy, as well as still loose monetary policy settings, major advanced economy stock markets continue to move higher, points out the research team at NAB.

Key Quotes

“Despite geo-political risks flaring up from time-to-time – for example, North Korea/US and Catalonia separatist tensions in Spain – markets have not been particularly volatile. Overall commodity prices continue to broadly track sideways, although oil prices have been rising since the middle of the year.” 

“There has recently been some easing in long-term bond yields. That said they still generally remain above their mid-year level, prior to the shift in advanced economy central bank rhetoric away from further easing to when to tighten. However, any moves on interest rates will be gradual, and some central banks are still engaged in large scale asset purchases, although in these cases the pace has slowed down. Even with the Fed starting to reduce its balance sheet, major central bank balance sheets will continue to be very large for years to come.”

“In November, the Bank of England (BoE) became the third major central bank to lift rates this year, following earlier moves by the US Fed and the Bank of Canada. The BoE’s circumstances are different to other central banks – while growth has slowed following the Brexit vote, inflation is well above target and the unemployment rate is low. At this stage all the BoE has done is unwind its emergency post Brexit rate cut, and it is only signalling future ‘gradual’ and ‘limited’ rate rises.”

“The European Central Bank (ECB) recently announced changes to its asset purchase program. Its net asset purchases are currently €60 billion a month but, starting in January 2018 and through to at least September 2018, the monthly pace will slow to €30 billion. Moreover, the ECB is saying that rates won’t start to rise until well past the end of asset purchases. So the ECB is still easing, just more slowly, but the end of asset purchases is in sight.”

“Similarly, the Bank of Japan also continues to purchase large amounts of assets, but at a slower pace. The reduced scale of asset purchases followed the policy switch in late 2016 to target a 10 year government bond yield of around zero per cent.”

“In contrast, from October 2017 the Fed started unwinding the  stock of assets accumulated under its previous asset purchase  programmes, although only at a slow pace to start with.”