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Schroders: Global central bank roundup

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27 Mar 2017

Schroders: Global central bank roundup

While the Federal Reserve moves towards normalisation of interest rates, it appears to remain a remote prospect for Japan and the UK.

Keith Wade, Chief Economist & Strategist

The US Federal Reserve (Fed) took another step towards the normalisation of interest rates by raising its target range for the federal funds rate by 25 basis points to 0.75% to 1%.

This was only the third rate hike since December 2015, but the move had been fully anticipated by markets following strong signals from the central bank in recent weeks. Bond and equity markets have rallied following the announcement as there had been expectations of a more hawkish tone from the Fed, but Chair Janet Yellen maintained her reputation as a dove in the post-meeting press conference.

Despite consumer price inflation hitting 2.7%, there was no hint of a desire to accelerate rate hikes with the famous “dot plot” of Federal Open Market Committee members’ rate expectations unchanged for 2017 and 2018. The Fed indicated it is happy to see headline inflation run above 2% for a period. Although there is now more consensus on the rate committee that the Fed will deliver three hikes for 2017, there was no step-up in the pace of anticipated tightening.

The Fed is likely to have been pleased at the market reaction as in the past market volatility has constrained its ability to act. This time, with equity and credit markets rising while bond yields and the dollar fell, it could be argued that overall monetary conditions in the US have not tightened and may have even loosened with the Fed rate rise.

Elsewhere, policy normalisation looks more remote in the UK and Japan. Both the Bank of Japan and Bank of England will have been closely watching the Fed for both what its action tells us about the world’s largest economy and for any spillover into currency markets. Today, both left monetary policy unchanged.

The Japanese economy is performing better, but unlike in the US, inflation is still some way from its 2% target. For the UK, high and rising inflation is expected to cool consumer spending while fears over the impact of Brexit uncertainty on capital expenditure are expected to slow demand, hence the need to keep policy loose.

 

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Important information For professional advisers only. This material is not suitable for retail clients.  Past performance is not a guide to future performance and may not be repeated.  The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.  Schroders has expressed its own views and these may change. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue.  Our forecasts are based on our own assumptions which may change.  We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts.  Forecasts and assumptions may be affected by external economic or other factors. Issued in March 2017 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority.

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