Henderson: Central banks on guard

This week saw the latest monetary policy meetings from the Bank of Japan (BoJ), the US Federal Reserve (Fed) and the Bank of England (BoE). All the central banks opted to keep monetary policy unchanged, though signalled an incrementally less dovish outlook than they had done previously.

While the BoJ lowered its near term inflation forecast, inflation was expected to continue to move towards target over the forecast horizon. This continues to look ambitious and in our view there still remains too little domestically generated inflation to justify the forecast. We continue to believe the market is underpricing the likelihood of a renewed easing in monetary policy in 2017. 

The Fed’s Federal Open Market Committee (FOMC) set a low bar for a potential hike at the December meeting, encouraged by stronger data and a firming in inflation expectations, though more recent declines in oil and gas prices may temper those expectations somewhat. 

Finally the BoE removed its easing bias as inflation was projected to move above the 2% target as a result of the fall in sterling, before moving back down. While growth forecasts were increased for 2016 and 2017, 2018 forecasts were dropped to 1.5%, with unemployment still expected to rise around 0.5% to 5.6%. Although the BoE stated a more neutral bias, the risks are that Brexit uncertainty weighs on growth by more than expected. The fall in the UK currency is unlikely to lead to much of a boost from net exports, while consumption may be softer as wages fail to rise in line with inflation. We believe the market has now underpriced the risk of a further easing by the Bank of England over the coming year.