Monetary policy divergence — and the opportunities and risks it presents — is set to take center stage in conversations among global money managers in 2015, with expectations that divergence will accelerate.
Chatter will cover tightening and loosening of monetary policies, plummeting currency valuations and uncertainty over the timings of decisions by central banks calling the shots.
“It is the first time for many years that we have explicit monetary policy divergence,” said Bill Street, head of investments for Europe, the Middle East and Africa at State Street Global Advisors in London. “(In the past) we have had coordinated intervention by all (Group of 10) central banks, leading to a competitive depreciation of currencies. We are stepping away from that, which brings volatility in currency and in asset classes.”
“It is astonishing how divergent central banks have been,” said Eric Lascelles, chief economist at RBC Global Asset Management Inc. in Toronto. “It is interesting to contemplate that central banks diverging is (being done) with the intention of converging economic activity down the line.”
Executives at money managers said the U.S. and the U.K., after several years of quantitative easing, are set to tighten monetary policy at some point in 2015.
The European Central Bank has already begun to loosen fiscal policy and is depreciating its currency. The Bank of Japan is extending its quantitative and qualitative easing program.
“We expect monetary policies to diverge much more in the future than they have in the recent past,” said Jean-Luc Schneider, Paris-based deputy director, policy studies branch, economics department, at the Organization for Economic Co-operation and Development. “We expect the Fed to have to start tightening the policy at some point in 2015, whereas the Bank of Japan will continue its quantitative and qualitative easing, and will probably have to increase it — as (Bank of Japan Governor Haruhiko) Kuroda has announced he would be ready to do so. If this happens, as we hope and expect, there will be an obvious and strong divergence between policy stance in the U.S., and Europe and Japan.”
He said OECD officials are “not sure how markets will react, and (what may be) the implications for emerging markets in particular. ... We don't know which way the capital may be flowing. This may be mostly an issue for macro prudential policy, as managers of financial institutions like policy divergence that creates earning opportunities.”