Interest Rates: Higher neutral? – ANZ

Over the past few months we’ve seen a greater number of central banks talk about the removal of monetary policy stimulus as the Fed is set to announce plans for balance sheet reduction shortly and the ECB is inching closer to the QE exit door, explains the analysis team at ANZ.

Key Quotes

“The BoC has hiked and the BoE is talking about the prospects of that “in the coming months”. Even the RBA has turned a little more hawkish recently, and our Australian colleagues will no doubt be perusing the Board minutes today for any more clues on that. While in most cases this reflects cyclical forces, as demand conditions have improved, it also reflects growing financial stability concerns too. But BoE Governor Carney raised an interesting idea in a speech overnight regarding the possibility that the global neutral interest rate (r*) may be rising. This premised on the idea that major economies are rotating away from consumption and towards investment and as fiscal policy becomes less contractionary.”

“All else equal, that means that a “static monetary policy stance becomes more expansionary”. To be fair, he still talked about secular forces holding down long-run global equilibrium rates, meaning “that policy rates can be expected only to rise a limited extent at what can be expected to be a gradual pace”, but the bottom line is that central banks are unlikely to be sitting still and a turn in the global liquidity cycle is knocking louder on the door.”