Absence of price pressures checks central bank hawks

Tuesday, July 11, 2017

Subject

The impact of persistently low inflation on the pace of monetary policy 'regime change' in most countries.

Significance

The US Federal Reserve (Fed) published the minutes of its June 14 interest rate-setting meeting on July 5, showing increasing divisions over the pace of tightening as inflation eases. The Fed remains committed to starting to shrink its 4.5-trillion-dollar balance sheet this year, but there are disagreements over the timing of both the unwinding and further rate hikes. Subdued inflation is also constraining the ECB’s plans to withdraw its monetary stimulus, despite speculation about a ‘regime change’ in monetary policy driving the yield on the benchmark 10-year Bund to its highest point since January 2016.

Impacts

  • The yield on 10-year US Treasuries has risen since June but remains below its mid-March level when ‘reflation trading’ was in full swing.
  • Emerging market bond funds are vulnerable to tighter policy and suffered outflows for the first time this year in the week ending July 5.
  • The average world oil price has fallen by more than 10% since May to below 50 dollars a barrel amid concerns of a supply glut.
  • The Bank of Canada may raise rates for the first time in nearly seven years on July 12, while the Fed chair will testify before Congress.
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