Investment Desk Bulletin

27 June 2017

A Tale of Central Banks: A shift in policy regime?

IDB 20 06 17

By Sanjay Joshi

In this week’s IDB we consider the recent change in tone of Central Bank policy meetings and communications and consider whether they signal a shift in policy regime.

Since 2010 there has been a prolonged period of global monetary easing. Quantitative Easing (QE) has underpinned loose policy in order to bail out markets, with Central Bank balance sheets peaking at 40% of global GDP.

In recent weeks the US Fed, Bank of Canada (BoC), Bank of England (BoE) and the European Central Bank (ECB) have signalled a possible change in policy stance given the improving economic backdrop and higher expected levels of inflation.

The Federal Open Market Committee (FOMC) have indicated that this autumn they will increase interest rates and reduce the balance sheet from $4.5 to c$3 trillion by 2020, despite not expecting the economy to accelerate.

In the UK, headline CPI is up but the broader economy is losing steam, with retail, housing and wage growth slowing. Despite this, three members of the BoE Monetary Policy Committee voted for an interest rate hike at June’s meeting.

In the Eurozone, labour force changes are depressing wages with an increase in part-time and temporary employment, but the ECB has effectively ruled out another rate cut.

Regardless of these recent communications real rates remain deeply negative and are not expected to increase notably.

London & Capital maintains a slight bias towards equities with a cyclical focus, whilst fixed income remains overweight in financials, Emerging Markets (EM) and cyclical issuers.