The lack of inflation and the possibility of deflation has been the focus of central banks around the world as they cut interest rates and then embarked on non-conventional monetary policy such as quantitative easing in an attempt to stimulate growth and push prices higher.
However, inflation is seemingly at an inflection point. The word ‘deflation’ may exit the financial lexicon over the coming months as commodity prices stabilise and global excess capacity is slowly reduced, and investors position for modestly higher rates of inflation.
Inflation in both the UK and the US has reached the highest rates in almost two years at 1.0% and 1.5% year-over-year respectively. In the US economy the rise in the price of oil over the last year is filtering through into higher energy costs, meanwhile the UK inflation rate got an additional boost from the tumbling value of the pound.
continue reading below:Monthly-Notes-November-2016.pdf
Since the Global Financial Crisis (GFC), central banks have relied on experimental monetary policies. However, these policies have more of an impact on financial markets rather than economic fundamentals. Asset prices have been driven higher to the point where valuations for global equities, fixed income and housing markets are at or near record highs. Quantitative Easing (QE) had become the tool of choice for most global central banks needing to promote economic growth and inflation when lower interest rates have failed. Unfortunately, QE has not been as successful as hoped in achieving its key objective. Global growth has slowed and price inflation remains well below target in the vast majority of developed nations. We may now be at an inflection point. The Bank of Japan’s (BoJ) September meeting was a key turning point in central bank policy where it changed its monetary framework from targeting the monetary base to focusing on yield curve control. Under its new policy framework, the BoJ will buy and sell long-term bonds in order to keep the 10-year bond yield at 0%. This means that if 10-year government bond yields fall below 0%, the BoJ will actually have to sell bonds rather than buy them, which effectively amounts to quantitative tightening, not easing.
Continue reading below:Monthly-Notes-October-2016.pdf
Following the economic crisis of 2008, government debt levels in many advanced economies rose as governments sought to rescue the financial system and boost demand, but the underlying issues of employment and stagnant incomes have remain unresolved creating a backlash against globalisation and international trade. Housing affordability has declined due to excess liquidity causing property values to rise. The inability of governments to deliver on promises to restore growth and prosperity is a factor causing the rise of populist movements and nationalism. Brexit, for example, is symptomatic of these pressures. Looking ahead, these same forces will be in the background for the US presidential election, and the German and French elections in 2017. Even if they are unlikely to gain power in their own right, far-right and far-left political parties or movements are reshaping agendas. The United Kingdom Independence Party (which has a single elected member in the U.K. House of Commons) was influential in June’s EU referendum.
Continue reading below:Monthly-Notes-September-2016.pdf