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Points of View: Divergent Central Banks

Quantitative Easing (QE) has dominated investor headlines this week. As had been expected, the US Federal Reserve officially ended its QE stimulus programme last Wednesday, having been gradually reducing its asset purchases from a peak of $85bn per month.  In its accompanying commentary, though, the Federal Reserve was keen to reassure investors that US interest rates will remain low for a considerable period of time.  Furthermore, within 48 hours, the Bank of Japan (BoJ) surprised markets with a huge increase in its QE activities, reminding investors that other central banks are moving in precisely the opposite direction to the US Federal Reserve.

 The decision from the BoJ only held a 5-4 majority from the policy board and is the latest of its policies aimed at preventing sustained deflation. The level of stimulus in Japan, relative to the size of the economy, is far larger than that of any other major central bank and the Yen has now fallen approximately 30% against the Euro over the past year.

With similar deflationary pressures prominent in Europe, the European Central Bank (ECB) will no doubt be monitoring the results of this extra Japanese monetary stimulus very carefully.  Should it not prove effective in restoring inflation it would suggest that monetary policies alone are not sufficient in tackling the growing global deflationary forces.  However, if the Japanese monetary policy does return inflation to Japan, there will be an increased demand on the ECB to introduce full-blown QE in the Eurozone.

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