This year could have been one of great financial reform but instead of much needed monetary policy divergence, it appears that the major global central banks are converging yet again. Sure, they may be taking a few different trajectories, but they are definitely moving in similar paths.
For example, the US Federal Reserve remained vigilantly still, Wednesday, loosening their grip only long enough to adjust for even tighter plans. And just before that, the Bank of Japan also tightened their policy on short and long-term yields. Similarly, the European Central Bank is holding strong its loose settings in order to review its existing all-out stimulus approach to recover. Also, economists expect the Bank of England to cut once again and for financing in China to remain liquid.
And this collective movement is sign that it will probably be a long, hard fight to lift inflation to reach targets. It may also be a sign that aging populations and slogged down productivity growth have, in fact, cut long term growth potential and neutral borrowing costs in the distant future.
According to Rabobank International head of financial markets for Asia-Pacific, Michael Every, “Interest rates are lower for longer everywhere. It is a structural function of the dysfunctional global economy that we have.”
Of course, this is actually pretty good news for assets markets during a time when it could be entirely possible the rallying bond market could continue and make it harder to exit today’s crisis-level policy setting efforts.
Additionally, Natxis Global Asset Management chief market strategist David Lafferty notes, “Raising interest rates or unwinding asset purchases could further slow the global economy and maybe even cause the next recession. While we acknowledge this risk, we believe central banks have reached a tipping point where the negative side effects of extraordinary policy now seem to outweigh its ever-diminishing benefits.”
Finally, Societe Generale SA, Hong Kong, chief Asia-Pacific economist, Klaus Baader, comments, “The much lower pace of tightening by the Fed has allowed central banks in other parts of the world to increase monetary stimulus. If anyone has converged with the rest of the world it’s the Fed.”
At the end of the day, global growth is still expected for next year but banks are just more concerned than ever about the associated risks.