Thursday, January 15, 2015
A look at the likely divergence of monetary policies around the world
- The Fed's balance sheet is five times its 2008 size and will start contracting.
- The ECB's balance sheet is one and a half times its 2008 size and will expand in 2015.
- Other central banks will be pressured to ease, to avoid their currencies from appreciating too much, costing export market share.
- 'Beggar-thy-neighbour' currency depreciation will keep global monetary conditions loose.
The ECB will soon unveil a sovereign quantitative easing (QE) programme to drive down long-term interest rates. The Bank of Japan (BoJ) is also expected to expand further its QE. Meanwhile, the Federal Reserve (Fed) and the Bank of England, which started QE in 2008 and 2009 respectively, have ceased asset purchases and will raise rates.
The ECB and BoJ's balance sheet expansion will weigh on the euro and the yen. Both central banks want the domestic inflationary effect of a weaker currency to forestall deflation. Competitive devaluations are likely.
The People's Bank of China, which has the largest balance sheet of any central bank, may weaken the renminbi to support China's exporters. Its surprise rate cut in November could be repeated.
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