Central banks’ dovish attack
City Index January 21, 2015 10:29 PM
<p>Today’s onslaught of dovish surprises from the world’s major central banks is a stark reminder of deflation realities creeping into policymakers’ priorities, regardless of multi-year […]</p>
Today’s onslaught of dovish surprises from the world’s major central banks is a stark reminder of deflation realities creeping into policymakers’ priorities, regardless of multi-year lows in unemployment rates in the US, Canada and the UK. The Bank of Canada’s 25-bp rate cut (the first cut since 2009) suggests that BoC’s s assessment of the growth-eroding dynamics has overreached into its deflation-bound territory.
The leaked report of a €50 bn monthly ECB QE program into the end of 2016 suggests that the €600 bn total is well in line within the market’s forecasts and onto the path of revisiting the +€3 trillion threshold attained in July 2012. We do not rule out further slashing of ECB ‘s refinancing rate in tomorrow’s announcement to add on to the surprise element as well as encourage new borrowers into the upcoming LTROs.
Fed chair Yellen inferred at the last Fed meeting that interest rates could start rising this summer. The case for doing so may be supported by fresh six-year lows in the unemployment rate, strong services and manufacturing surveys and increased capacity utilisation. But none of these may be enough for the Fed to effect a rate hike at the risk of endangering a deflationary spiral. In the event the Fed does raise interest rates, it would likely be accompanied by a generous provision of policy accommodation such as reinvesting the proceeds of coupons from maturing bonds.
Not only we expect the flattening yield curve to stand in the Fed’s way to raising rates, but an increasingly un-cooperative stock market starting to feel the loss of purchasing power, partly exported from China as the CNY finds no other way but to depreciate.
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