Easy does it

The European Central Bank (ECB) recently became the third major central bank to state that it was about to reduce its bond buying programme and begin to wean the markets off cheap money by halving the amount of bonds it buys every month. This now only leaves the Bank of Japan (BOJ) in full quantitative easing mode.

By Neil Worsley, investment strategist, Hedley & co.

The Japanese economy has seen its best expansion in 16 years, the stock market is near a two decade high, labour conditions are tight and inflation is well below target.

However, should financial markets be worried that central banks are all at least contemplating withdrawing this massive support programme and virtually in tandem?

As an economic theory put into practice, quantitative easing and flooding the world with cheap and plentiful money can be said to have been at least supportive of a global recovery.

If we look around Europe and North America we can see that a healthy economic recovery is taking shape with steady inflation, rising employment and decent economic rates of growth.

This in turn is providing a positive backdrop for smaller and developing economies. It is true that this exercise has also created some distortions which need to be managed very carefully and could yet prove troublesome.

The bond markets, for instance, have suddenly seen a huge, ready buyer begin to withdraw and this could lead to a big upheaval if not managed properly. After all, forcing yields to ‘unnaturally’ low levels is one thing, normalizing conditions and ensuring that part two plays out as scripted is another and could be the more difficult to enact.

However, as central banks begin the support withdrawal plan and begin to edge rates higher they are certainly more than aware of the need for a very slow and steady programme in which the unwinding process could take decades.

In the meantime, it is unlikely that central bankers will do anything to surprise markets, after all, they are really on our side, whatever markets may wish to think. For regulatory disclosures, please visit www.hedleyandco.co.uk/publications and click on Hedley Regulatory Disclosures.