Central banks the focus of market attention

Recent market focus has squarely been on the advanced economy central banks, as meetings of the European Central Bank (ECB), the Bank of Japan (BoJ) and the US Federal Reserve (the Fed) kept markets watchful. As it turned out, statements of intent characterised these meetings rather than any formal shift in policy. Importantly, further policy accommodation was not ruled out by central banks as they endeavour to spur inflation and growth.

The ECB met early in September. Policy rates remained unchanged, with the main refinancing rate and deposit rate left at 0.0% and -0.4%, respectively. The ECB also reaffirmed that it would continue to purchase €80 billion per month of assets “until the end of March 2017, or beyond, if necessary” in order to drive inflation towards its target.

However, despite a commitment to an ongoing accommodative policy stance, ECB President Mario Draghi’s comment that additional stimulus may not be necessary “for the time being” garnered a significant market reaction. Bond yields rose relatively sharply as a result, with German 10-year bond yields moving into positive territory for the first time since declining below zero in the wake of the Brexit vote. Despite proving to be short-lived, this move reverberated around global markets, with US and Australian bonds selling off. This underscores how sensitive markets have become to even the slightest suggestion that additional monetary policy accommodation may not be implemented.

Developed market’s 10-year bond yields
Bonds sell-off marginally


Source: IFM Investors, Bloomberg

The BoJ met late in September and was expected to deliver additional support to the goal of achieving its 2.0% yearon- year inflation target. While policy rates were unchanged at -0.1%, the BoJ altered its policy framework. The previous monetary base target was abandoned in favour of “yield curve control”. Effectively, the BoJ will target a 10-year bond rate of 0.0% and adjust the degree of monetary stimulus accordingly. This is designed to boost growth, support the function of the financial system and drive inflation to overshoot its 2.0% target. These measures will be in place until this final condition is met.