Monetary policy has been a key driver of the global financial markets since the 2008 U.S. subprime mortgage crisis, which quickly devolved into the biggest economic meltdown since the Great Depression. Nearly a decade later, monetary policy – the actions carried out by central banks – remains a focal point for investors trying to predict the future.
Central banks influence the market in several ways. Since 2008, record stimulus through quantitative easing and record low interest rates have been employed by central banks in North America, Europe and Asia to encourage economic growth in the wake of the crisis. For policymakers, these measures are considered necessary to boost economic growth and encourage price stability.
Despite these efforts, the results have been mixed. Weak economic growth, volatile commodity markets and geopolitical tensions have made it difficult for policymakers to carve out an effective response. Below is a rundown of the current state of monetary policy for four major central banks.
U.S. Federal Reserve: The Fed is the only major central bank on track to gradually raise interest rates. After ending its record quantitative easing program in 2014, the U.S. central bank has been normalizing monetary policy ever so gradually. The Fed is expected to hike its overnight rate on three occasions this year, putting it on a divergent path with its global counterparts.
European Central Bank (ECB): Back in December, the ECB extended its monthly bond buying program by nine months to December 2017, but in doing so also cut the size of those purchases to €60 billion per month from €80 billion. ECB policymakers are now reportedly considering whether they should raise interest rates before the current stimulus program ends. This will depend largely on the performance of the Eurozone economy over the next two quarters.
Bank of Japan (BOJ): After years of ‘Abenomics’ (a term that describes Prime Minister Shinzo Abe’s expansive stimulus program), the BOJ changed direction last September by targeting interest rates. Clearly, the previous program wasn’t working, as Japan continued to underperform in terms of growth and inflation. However, the results of the policy shift have been mixed so far, with GDP growth slowing over the last two quarters.
Bank of England (BOE): The United Kingdom’s decision to leave the European Union (EU) put the BOE on high alert last summer. The central bank slashed interest rates to a new record low last August to cope with the Brexit blowback. Although the British economy has performed better than expected since the referendum, the Bank remains committed to easing monetary policy even further should the economy sputter once official exit negotiations with Brussels begin.
Central banks policy has a tremendous influence on virtually every financial asset. Over the next several months, investors will be keeping close tabs on the Fed, ECB, BOE and BOJ for clues about any potential shift in policy.
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 Jana Randow and Alessandro Speciale (March 10, 2017). “ECB Said to Have Discussed Whether Rates Can Rse Before QE Ends.” Bloomberg Markets.