- Bloomberg – Central Banks to Stay Looser Longer Than Markets Expect
This is a busy time for major central banks. The Bank of Japan and European Central Bank met last week, the Reserve Bank of Australia and the Federal Reserve meet this week, and the Bank of England meets next week. Although most major central banks are deciding not to make big changes to monetary policies, global interest-rate expectations among investors have shifted to a tightening bias driven almost entirely by the anticipation of expansionary fiscal policy. The reality is that central bank policy on average is likely to stay looser than generally assumed by markets. To understand why, you need to first consider the stark divergence between economic data that is based on sentiment and data that is based on actual activity. The sentiment-based, or “soft,” data has consistently surprised to the upside, creating a strong correlation with higher interest-rate expectations. The actual, or “hard,” data such as measures of gross domestic product or factory production has been relatively weak. This divergence may drive central bank policy expectations in opposite directions with consequences for different markets.