Central banks not ready to throw in the towel

At the beginning of the month, markets were nervous that we might be witnessing the first signs of central banks throwing in the towel – the beginning of the end for unconventional monetary policy.  The Bank of Japan (BoJ) announced that they were undertaking a so-called ‘Comprehensive Assessment’, in part to address the costs of ultra-low long-term interest rates on the profitability of banks and insurers.  There was also a feeling that the European Central Bank was contemplating similar trade-offs, conscious that there would eventually be a limit to providing more stimulus.

With this background, the meetings of the US Federal Reserve (US Fed), BoJ, and Reserve Bank of New Zealand (RBNZ) this week became even more important, to see if there was any substance to the rumours and worries.  In our view, these most recent announcements only served to reiterate the determination of central banks to keep stimulus in place to lift inflation expectations to targets.

US Federal Reserve 

The key sentence in the US Fed’s press release was that “the Committee judges that the case for an increase in the Federal Funds Rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives”.