Business

The end of the easy monetary policy era

Published: 4:00 AM, June 19, 2017

The United States Federal Reserve was met with both hope and scepticism late last year, when it was revealed that the central bank’s policymakers intended to steer the world’s No 1 economy with three interest rate hikes of 25 basis points each this year.

At the time, global equities were still inebriated on US President-elect Donald Trump’s then business-friendly promises of tax cuts, infrastructure spending and deregulation. The narrative is looking rather different now.

Still, with the Fed having raised in its June meeting its key interest rate target for the second time this year, while signalling more hawkish action on the horizon, markets are now more inclined than before to believe that the central bank will stay on its intended course for the rest of the year.

Similarly in the United Kingdom, inflation created by a falling pound in the wake of the Brexit referendum has started to put a squeeze on the Bank of England’s (BOE) interest rate decisions. With inflation overshooting a prime concern, there has been a marked increase in the number of votes within the BOE’s monetary policy committee to hike interest rates.

The European Central Bank may soon see similar hawkish pressures if eurozone inflation creeps up towards its target levels.

On the Asian front, the People’s Bank of China has also started to temper market expectations of easy policy and cheap financing by hinting at a “new normal” of slowed money supply growth and increased credit quality. The new global trend is clear: The era of easy monetary policy will soon pass.

This new era of tightened access to liquidity and credit is expected to exert a broad-based squeeze on future profits of net debt-bearing businesses across the globe. This may also be why we are seeing a gradual stall to equity prices as they struggle to maintain the bullish momentum they have enjoyed so far.

Further appreciation of the US dollar against other currencies may also be slowed, as prospective monetary tightening is no longer a theme specific to the US. Welcome to the new era of interest rate normalisation: The easy days are over.

ABOUT THE AUTHOR: Woon Tian Yong is an Investment Analyst with Phillip Futures.