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The retreat from QE: a central bank scorecard

A week after European Central Bank president Mario Draghi rattled markets by declaring victory against deflation, Sweden’s Riksbank said that higher inflation expectations and an easing in external risks made further rate cuts “less likely than before”.

Forecasts of a slow summer in markets have been disabused by a sudden shift from central banks towards normalising monetary policy. For investors, this has a number of implications. Bond yields are moving higher and the dollar is weakening against the euro, the Canadian dollar, the pound and other currencies whose central banks have signalled a shift in policy.

Many assets look overvalued, says Paul Mortimer-Lee, chief market economist at BNP Paribas, and in an environment of rising volatility, “stretched equity valuations mean stocks could be heavily in the line of fire”.

Some are starting to compare this period with the 2013 “taper tantrum” that followed the first signals from former Federal Reserve chairman Ben Bernanke that the US central bank would end its bond buying. According to Win Thin at Brown Brothers Harriman, “we are already seeing a mini ‘taper tantrum’ from the ECB’s shift”.

Bank of England chief economist Andy Haldane, who last month surprised investors by shifting his stance from dove to hawk, pointed out that the first 25 basis point rise in UK interest rates for 10 years may look like “a momentous step”, but “it would still leave monetary policy highly accommodative by any historical metric”.

Any tapering would have to go a long way before it started eating into the expansionary policies of many G10 central banks. And the case for a normalisation in rates may still be undermined if weak wage growth dents confidence that inflation is rising.

Here is what we know about the policy stances of leading central banks:

With four rate rises in 18 months, the Federal Reserve is clearly the most advanced. The weakness in the dollar suggests that investors currently have more faith in the retreat from QE of central banks outside the US than that the Fed will add more rate rises this year.

Bank of Canada looks ready to raise rates. Beyond the Fed, it has sent the strongest signal of normalisation after its two leading policymakers stressed the end of monetary easing.

The Bank of England could follow. Its Monetary Policy Committee last month voted 5-3 to hold rates at a record low, since when its members have engaged in a fairly public debate about the wisdom and timing of a rate rise. However, Mark Carney, its governor, may continue to resist the hawkish direction of some of his colleagues.

Investors are particularly exercised about the ECB. Mr Draghi’s comments on policy normalisation last week rattled the markets, and, according to analysts, may lead to an announcement in September on tapering.

Joe Prendergast at Credit Suisse expects tapering to start in early 2018, “but this would not be a material hawkish shift in ECB policy. Draghi has stressed that the ECB must be persistent in order to move inflation closer to target and avoid acting too early.”

The Reserve Bank of Australia on Tuesday gave an upbeat economic outlook, but worried about subdued consumption growth as it announced no change to monetary policy. “Not a hint of hawkishness was visible,” says Société Générale’s Kit Juckes.

Analysts think a strong economy gives the Reserve Bank of New Zealand good reason to tighten policy, but it continues to strike a note of caution. However, with the kiwi dollar closing in on year-highs against the yen, Bank of America Merrill Lynch’s Kamal Sharma says the strength of the currency “may become a focal point for the RBNZ again”.

Norges Bank last month took the foot off easing by removing its bias towards cutting rates, following the ECB’s shift to its forward guidance. Its inflation and growth projections are modest, but Crédit Agricole thinks downside risks are limited, so stability in oil prices could push the Norwegian krone higher.

Swiss National Bank has been fixated on forex intervention to prevent the Swiss franc appreciating too far and too fast. Its fortunes are closely linked to the eurozone, so the SNB will be happy to allow ECB tapering to drive the euro higher. That would allow the SNB to reduce intervention, say JPMorgan analysts, something that was inevitable given that the policy is costly and unsustainable.

The one significant central bank not signalling a retreat from QE is the Bank of Japan. It seems firmly committed to bond buying, leaving yields unmoved and making the yen likely to head lower.