Central banks around the world are likely to incline towards giving additional monetary accommodation as the global economy is expected to be in a low inflation and growth scenario, along with heightened uncertainty from political headwinds.
The US Fed is expected to shift to the sidelines and is unlikely to further raise rates in the forecast horizon, said Morgan Stanley in a research note. In a similar manner, the Bank of England is likely to lower the base rate by 40 basis points by the end of August and begin its quantitative easing program again in the autumn.
The European Central Bank is likely to further loosen its monetary policy by lowering the deposit rate by 10 basis points in September of this year. Also, it is expected to extend its QE program by additional six months to keep it running until September of next year.
The ECB is also likely to expand the QE program by including the purchase of senior unsecured bank debt, added Morgan Stanley. Meanwhile, inflation in Japan has fallen short of the Bank of Japan’s target rate. The central bank is highly expected to further ease policy in the summer.
The rebounding macro-stability scenario in the emerging markets, along with the US Fed expected to not hike interest rates in the forecast horizon, is likely to give leeway to central banks to ease policy. The Central Bank of Brazil is likely to lower its rate by 100 bps in the fourth quarter of 2016 and additionally by 325 basis points next year given that inflation is likely to decelerate to 7 percent from the current 9 percent by the end of 2016.
Meanwhile, the Bank of Russia is also likely to reduce its interest rate further in the second half of 2016 by 100 basis points and additionally by 200 basis points by 2017.
In AXJ, persistent deflationary pressures are expected to keep central banks on a trajectory of loosening policy. The People’s Bank of China and the Reserve Bank of India are likely to lower rates by additional 50 basis points, whereas the Bank of Korea is likely to reduce rates by another 75 basis points to just 0.5 percent, according to Morgan Stanley.
