Will Volatility Calm if Central Banks Keep their Promises?

Yellen has indicated the Fed will retain a dovish stance, and both the ECB’s Draghi and Bank of Japan’s Kuroda remain committed to further action to drive inflation higher

Andy Brunner 21 April, 2016 | 12:48PM

Given the scale and importance of recent monetary policy measures and pronouncements from the main central banks, no significant changes are anticipated at upcoming meetings or during the spring/early summer. Janet Yellen has indicated the Federal Open Market Committee will retain a dovish stance and be prepared to take risks with inflation overshooting its target to secure its dual mandate. Both the European Central Bank’s Mario Draghi and Bank of Japan’s Haruhiko Kuroda remain committed to further action to drive inflation higher if needed, with the latter possibly adding to monetary stimulus in July.

The Bank of England’s Mark Carney has his hands full with the problems presented by the EU referendum given growing short term economic uncertainty and a rapidly depreciating currency. The governor described the vote as being the biggest domestic threat to Britain’s financial stability.

Bonds Rally Despite Back-drop

Somewhat surprisingly, all fixed income markets, including government bonds, rallied through March and into early April. With government yields already at such low levels, most 10-year real yields are now negative, global growth expected to reaccelerate over the next few quarters and the main central banks all committed to boosting growth and inflation, investors are betting heavily they will not succeed.

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About Author

Andy Brunner

Andy Brunner  is Head of Investment Strategy, Morningstar UK

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