World Banks React to Fed Rate Hike

Central banks in Europe, Japan and Taiwan adjusted monetary policy off the back of the Federal Reserve raising rates last month - but the UK policy remained unchanged for now

Andy Brunner 6 January, 2016 | 8:12AM
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The Fed met market expectations at its December 16 Federal Open Market Committee meeting raising rates for the first time in nine years. The 25 basis points rise to a new band of 0.25-0.50% and a generally cautious statement were broadly welcomed by financial markets. The Fed’s expected future path of tightening for next year remained unchanged at 100 basis points but, with officials remaining concerned about weak inflationary trends, the trajectory was lowered slightly for thereafter. Most commentators expect three to four hikes in 2016.

Most commentators expect 3 to 4 interest rate hikes this year

With the financial markets having already priced in a significant further monetary policy easing at the European Central Bank’s December 3 meeting, disappointment with the changes was palpable enough to cause a near 4% reversal in euro/dollar on the day.

Despite a large number of changes, generally the ECB was perceived as tinkering with its QE programme. The main measures were; the deposit rate was lowered by 10 basis points to -0.30%, the programme duration was extended out to March 2017 from September 2016, maturing securities principal to be reinvested, eligible securities now to include regional and local government debt.

The main blow for the bulls was the unchanged monthly asset purchase – quantitative easing – pace of €60 billion. At least the ECB still has scope to ease should it prove necessary.

There was little new news from the Bank of England’s Monetary Policy Committee with concerns principally relating to buy-to-let market vulnerabilities. With inflation still around zero and wage growth receding recently, despite falling unemployment, any rise may well be a second half event.

With Japan’s recent data flow more encouraging and the Bank of Japan continuing to deliver an upbeat message on the economic outlook, the recently announced “supplementary measures” to the QQE programme came as a surprise. These were principally aimed at easing potential impediments to implementation of QQE rather than easing further but included an extension to the average maturity of bond purchases and also the buying of particular ETF’s such as the JPX – Nikkei Index 400.

Elsewhere, Taiwan cut rates by 12.5 basis points to 1.625%, despite recent Chinese easing and the Fed lift off, while both Mexico and Chile raised rates by 25 basis points to 3.25% and 3.5% respectively in the wake of the Fed’s rate hike.

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Andy Brunner

Andy Brunner  is Head of Investment Strategy, Morningstar UK

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