Central Banks: QE to QT will dominate the 2018 market and policy outlook - Westpac
|David Goodman, Research Analyst at Westpac, suggests that 2017 will be remembered for unusually low levels of volatility as QE and central bank liquidity pacified and assuaged markets. However, 2017 also marked an important point, as combined G3 central bank balance sheets peaked in August at an all-time high of just over USD 14 trillion, he further adds.
Key Quotes
“The FOMC’s tightening cycle and balance sheet normalisation will continue through 2018, ECB has committed to a tapering path in 2018, and BOJ is running well short of its ¥80trn purchase pace. Given central bank balance sheets have peaked and the pace of accumulation is slowing, we are clearly moving from quantitative easing to quantitative tightening (QE to QT). The Fed’s balance sheet normalisation is designed to be gradual and predictable, and of course can be stopped or modified if it unleashes excess volatility. However our core view is that with the global tide of liquidity reversing through 2018 and 2019 and policy uncertainty increasing, market volatility should increase.”
“Economically, inflation is the missing piece of the puzzle. This is a global phenomenon and we are seeing many countries with “below target” core inflation outcomes despite very accommodative policy levels and near full employment. We expect global growth of 3.7% in 2017 and 3.6% in 2018, yet wages growth is failing to respond in many countries to this improved growth and employment outlook (Australia is no exception), as a series of idiosyncratic and temporary factors weigh. That said, technological changes and globalisation suggest altered inflation dynamics could be more persistent and the Phillips curve not as reliable as in the past.”
“This will be a key part of the policy outlook for 2018, as RBA Lowe commented: “Low growth in wages means low inflation, which means low interest rates, which means high asset valuations. So a lot depends on understanding the reasons for slow growth in nominal and real wages.”
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