3 July 2017
Bassanese Bites: Central Banks Bark – Week beginning: 3 July 2017
The dominant global theme over the past week has been the increase in rhetoric from central banks – other than the US Federal Reserve – suggesting the day is nearing when emergency policy stimulus will need to be unwound. Global bond yields rose, while the $US and stock prices weakened. The weaker $US, meanwhile, provided some support to commodity prices, with oil up 2.9% for the week.
Most significantly, über-dove Mario Draghi suggested that “deflationary forces [in Europe] have been replaced by reflationary ones”. Although ECB official sought to play down Draghi’s remarks a day later, it was enough to push up the Euro and European bond yields over the week. Not to be outdone, the Bank of England and the Bank of Canada also hinted at policy tightening. To my mind, a broadening in monetary policy normalisation across the world would be a very healthy development, as despite persistent low inflation, the steady decline in unemployment rates in Europe, the United States and Japan suggest “emergency” policy settings are clearly no longer needed. Despite low inflation, “re-loading the cannon” so to speak is important to reduce the risks of financial bubbles developing, and leave central banks better equipped to deal with the next cyclical downturn.
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