As we enter 2019, we believe it is likely that the major central banks will continue to ‘normalise’ policy. The banks are very aware of the distortions caused in financial markets, as well as corporate and consumer behaviour, by almost a decade of near-free money. Keeping interest rates artificially low this far into the cycle, with low unemployment and rising wages, is quite possibly doing more harm than good.
The key central bank to watch in 2019 is the US Federal Reserve (Fed) – they are already some way through their hiking cycle, though with inflation at target and the US economy at full employment, they may well feel compelled to continue raising rates – not least if the US government continues to binge on debt to fuel economic policies. The economic data will be important given that the Fed is shifting to a more flexible and ‘data dependent’ attitude to their rate policy. As the de-facto rate setter for the world, and with talk of growth slowing, any signs that the Fed is close to ending their hiking cycle will be welcomed in markets, though history tells us the end of a hiking cycle normally coincides with an economic slowdown, often caused by the rate hikes themselves.
The Bank of England, faced with low unemployment and rising wages, is also keen to tighten policy but will have to wait until there is more certainty on the Brexit outcome.
As for the European Central Bank (ECB), we have seen quantitative easing come to an end but a tightening in policy seems some way away. However, we may see a technical rate hike at some point as the ECB looks to support banks impacted by years of negative interest rates. Once again, the language from Mario Draghi and his replacement in October 2019 will be closely scrutinised.
The Bank of Japan is still below its inflation targets, so we do not expect any significant policy shifts for now. Emerging market central banks are in reasonable shape to cut rates should growth ease and do not have many of the issues of their developed market peers in terms of bloated balance sheets from quantitative easing.