Economic and Strategy Viewpoint - October 2017

This month, our economists discuss global liquidity, the outlook for UK interest rates and falling inflation in emerging markets.

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From QE to QT: Whither global liquidity?

– The decision by the US Federal Reserve to start to reduce its balance sheet is welcome as it signals another step toward normality after the global financial crisis. US bond yields may rise, but should remain underpinned by the behaviour of inflation and declining estimates of long run equilibrium interest rates. Looking at the wider picture, even with quantitative tightening, global liquidity should continue to rise over the next 12 to 18 months largely supported by the Bank of Japan.

– However, whilst reassuring for markets we would inject a note of caution. The pace of liquidity expansion will slow and European Central Bank tapering may bring significant yield shifts and potential problems for the periphery. Furthermore, we question whether we can talk of global liquidity when international investors have to take account of currency and hedging costs in assessing returns.

UK: The unreliable boyfriend is back!

– The Bank of England has strongly hinted that it could raise rates as soon as November, despite the fragile economy and lack of wage growth. As a result, markets have brought forward expectations of a hike, and pushed sterling higher.

– The Bank has form in backing away from a hike, but it may not be able to this time. We now see a rate rise in November, but doubt that this will be the start of a major hiking cycle given the vulnerability of the consumer and Brexit uncertainty.

EM disinflation: The end of a trend?

– In some cases the fall in EM inflation has been astonishing, but even where it has been modest the trend has been undeniable. However, we think the disinflation trend may have run its course, with implications for policymakers and investors alike.

Views at a glance

– A short summary of our main macro views and where we see the risks to the world economy.

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