Ten years after the first glimpse of crisis, & major economies have recouped their GDP. But, despite ‘muscle flexing’, the road to policy normalisation will be long & slow, with the prospect of another two years of negative real rates in the US, UK, Japan, & euro-zone.
Our analysis suggests that by sustaining its QT programme, the US Fed could ‘take out’ as much as 130bp of further rate hikes by 2019. US rates, when they peak, should be far lower than we’re used to.
But, the frustration for all G7 central banks is that recoveries since 2009 have mainly been output driven. And, with output gaps slow to close & wage pressure still capped, they’ve yet to generate enough inflation to trigger central banks’ usual reaction functions.
The one main economy that has delivered inflation is the UK, which is doubtless a symptom of the pound’s decline. Yet, the BoE looks loathe to raise rates during the Brexit process. While the CPI should stay above target, the inflationary flame may snuff itself out.
The ECB, meanwhile, could taper its QE by ‘natural causes’ as some members’ buying limits approach. It could fill the gap by buying proportionately more from others, but this may not be palatable to Germany as it questions Mr Macron’s unified budget proposal.
Japan still has every incentive to prolong a policy loosening now in its nineteenth year. It may be the last to end QE. While, in China, even if President Xi addresses asset-price bubbles, rising corporate debt, & shadow banking, its policy tightening should be limited.
The more serious risk is US trade tariffs, where Mr Trump could still invoke ‘Super 301’. And, linked to that, it remains to be seen how more combative US/China relations become over N. Korea.
So, all in, this gives credence to the ‘new normal’ view of low-for-longer rates, rather than an imminent return to pre-crisis levels. In which case, the most we might expect even in 2019 is not for policy to become tight again by traditional standards, just less loose...
The future looks brighter for Brazil