Central banks and quantitative easing: Await the festive fireworks
Halloween is over and winter is fast approaching. The nights are drawing in and the weather is getting colder. In the UK this week, the streets and skies will also be alight with firework displays for Bonfire Night. Next week, India will be doing something similar for its Deepavali celebrations.
But this year, the real fireworks will be coming from the top policymakers at the world’s central banks.
Mario Draghi and his team at the European Central Bank last month gave more than a hint that its €1 trillion ($1.1 trillion) quantitative easing programme will be extended or ramped higher in December. Within 24 hours, the Chinese central bank had cut its main benchmark rate for the sixth time since November last year.
By the following Sunday, both Mark Carney, the Bank of England governor, and Swiss National Bank vice chairman Fritz Zurbruegg were penning dovish messages in their country’s national newspapers.
Last week, Sweden’s Riksbank decided to expand its own QE programme. The Bank of Japan and the Central Bank of Russia, meanwhile, kept rates on hold. But it’s only a matter of time. The latter signalled that it would cut rates in the coming months. The former is gearing up to increase the size of its asset purchases in the hope of boosting inflation.
Altering rates and QE – or even just hinting at the prospect – can be one way for a country’s central bank to intervene against currency fluctuations, despite it supposedly not being a primary goal for policymakers. A lower exchange rate can boost exports and provide a short-term fillip for an economy.
Natixis, a French corporate and investment bank, predicts that the Bank of Japan will soon add ¥5 trillion yen ($44bn) to its programme, with larger purchases of exchange traded funds (ETFs), Japan’s real estate investment trusts (J-REITs), corporate bonds and commercial paper.
Forget “currency wars”. This will be yet another global display of glittering easy money after years of ultra-low rates. Expect fountains of liquidity, soaring balance sheets and shooting exchange rates as policymakers try to ignite their economies.
Matthew Beesley, head of global equities at Henderson Global Investors, estimates that there’s been over 70 different central bank “easings” during 2015. And there’ll be more to come, no doubt.
Political wrangling in Greece and a scandal at Volkswagen did little to lower the single currency this summer. Thus, Draghi will have to get really “trigger happy” to produce the desired effects and cause his counterparts at other central banks to grow increasingly desperate.
Will the US Federal Reserve be the only central bank to dampen the mood with a rate rise this winter? Can it really tighten after disappointing data last week on personal income and consumer confidence?
Whatever the outcome, it’s going to be an interesting finale to 2015 for asset markets. Enjoy the show.