Central Bank Policy Overview

Over the past two weeks, we have seen policy decisions from a number of major global central banks that fell on a spectrum from unchanged to dovish policy action. To wit, the ECB, who met first on 10/22, decided to hold rates steady at 0.2% and also continued to hint at more easing in the future as the Eurozone struggles to spur material growth and any inflation at all. China’s central bank, while not on any official schedule, decided to cut its policy rate by 0.25% to a record low at 4.35%, while concurrently cutting the deposit rate to 1.5% from 1.75%. It also reduced reserve requirements by 0.5% for its banking system, as China is in full easing mode to battle ongoing declines in its economic data. Next up, the Fed met last week on 10/28, and held rates steady at 0-0.25%. While it seems that most economic pundits and research shops interpreted the statement released as hawkish, the fact remains that the Fed did not hike, and it continues to reiterate its data dependency. The incoming data continues to grow incrementally softer. The BOJ met last week on 10/30, and left its policy unchanged. Since 2013, the BOJ has given up on setting policy via a target lending rate, instead attempting to spur activity and induce inflation to rise to its target of 2% by setting a monetary base expansion target of 80 trillion yen per annum. Accordingly, it has left its pace of purchases unchanged despite lackluster growth and inflation data for the Japanese economy and in the face of ongoing calls for an increase in what is already (proportionally) the largest current stimulus plan on the planet. In the U.K., the BoE meets this week and is expected to hold its policy rate unchanged at 0.5%. While expectations are that the BoE will not be far behind the Fed in its interest rate hiking cycle (someday in the future), the U.K.’s data has taken a moderate turn for the worse since the middle part of this year, and expectations for when it will actually hike continue to be pushed out further into the future. None of this is at all dissimilar from our situation domestically. Growth and inflation around the globe in the world’s major economies continues to leave something to be desired as we approach the “10 years after the global financial crisis” time frame. Unless we begin to see some material changes in the data, it is difficult to imagine long-term rates moving up very far from their current level, either globally or domestically.

Source: Bloomberg, Federal Reserve