- The slide in oil prices is a ‘double-edged sword’ for central banks fi xated on +2%yoy CPI targets. Those hoping to start normalising rates this year will now have to seek non-infl ation reasons. With the probable exception of the US Fed, these will be diffi cult to fi nd.
- To gauge how G5 countries’ overall, monetary & fi scal, policy positions could change, we extend our Policy-Looseness Analysis to 2016. By taking explicit account of QE & fi scal positions, it beefs up the ‘Taylor Rule’ the Fed uses for setting rates.
- Loose policies will carry over into 2016. This looks less worrying in slow-growth Japan & euro-zone, where stimulus is needed just to stand still. But, in the fast-growing US & UK, the rate hikes markets expect will leave their overall positions much looser than pre-crisis.
- Vigilance will be needed. With the US & UK now growing above ‘potential’, & their CPIs set for ‘V’-shaped recoveries, running such negative (QE-adjusted) rates may increasingly raise eyebrows.
- Thus, the risk to markets later in 2015 may not be that the US Fed & BoE are set to tighten, but they are falling ‘behind the curve’...
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