With the US and UK looking to wean their economies off their central bank dependency, the ECB’s recent moves to ease monetary conditions and the Bank of Japan continuing to struggle to combat two decades of economic malaise, Central Bank meetings have become key market-moving events to an unprecedented extent.
Never before, in the investment World, have Central Banks been so prominent. They are no longer merely increasing or decreasing interest rates but instead announcing complex monetary policies which are in some cases unprecedented and untested measures. It will be impossible to navigate the investment waters of the next few years without keeping one eye firmly on Central Bank policy.
Each of the economies in question is at a different stage of their recovery cycle. The US and UK, who were the quickest to ease monetary conditions after the crisis, have been the first to see real economic recovery. Japan began large scale quantitative easing in April 2013 and as such is also ahead of the Eurozone in its economic recovery. The ECB has been, to date, slow to act and as a result the Eurozone economic recovery has been very sluggish in comparison to its peers.
The fact that each of these economies is at different points in their recovery means that each will have different opportunities and challenges in the coming months and years. Investors in the UK for example may have to worry about rate rises before 2014 is over, while Eurozone investors are unlikely to have any such concerns in the near term. We are likely to begin to see some strong underlying economic numbers in the US and UK which will support the market as the stimulus is removed. It is likely also that Mr Draghi will eventually be forced into a more expansive raft of measures (essentially QE) which should help maintain global liquidity.
Inflation is the metric on which Central Banks have traditionally based their policies. While low inflation is generally a positive, deflation or even the threat thereof can have a devastating impact on a country’s economy. Inflation in the Eurozone has of late been at very low levels and falling. The threat of deflation has forced even the inflation-averse Germans to concede that some action is necessary.