19 March 2024
If you are covering the latest news in financial markets, please find below a comment from Lindsay James, investment strategist at Quilter Investors:
“With the Bank of Japan finally announcing its first rate hike in 17 years, the chapter has closed on an era that brought the world ultra-easy money and introduced quantitative easing (QE) to the vernacular, but also drove asset price inflation that has seen equity returns far exceed the upper bounds of their usual bandwidth since QE was first copied by the US in 2008. Good news of course for those invested, but also laying the groundwork for today’s problems of inequality.
“For investors in Japanese equities, who have enjoyed breakout returns of 21.95% in sterling terms in the 12 months to the end of February, this first rate hike shouldn’t be a cause for a concern. The Bank of Japan has assured the market that rates will continue to remain accommodative even as yield curve control – its process of systematically buying 10-year government bonds to keep yields capped at 1% - has been watered down to a pledge to buy bonds ‘as needed’. There is no signal that this is the first hike of many, particularly given disinflationary trends have returned in the past six months. However, with signs that wages are set to grow in excess of 5% in the year ahead the Bank of Japan is clearly keen to move forward with its normalisation of monetary policy, this era of ultra-low interest rates looks set for the history books.
“With the Federal Reserve and Bank of England due to update markets later this week following rate-setting meetings, we can expect quite a different tone. With inflation still the core focus of central banks, despite signals that investors are beginning to move on, it remains to be seen how markets will react if the Federal Reserve indicates that its ‘data dependent’ approach will mean investors must wait longer for rate cuts. The soft landing scenario, which has become a near consensus view, may well end up facing increasing challenge if it turns out that rather than three cuts by year end, investors will be getting virtually none. The Bank of England signalled confidence that inflation would fall to target or below in the coming months, so it must face up to the question of whether it is bold enough to move ahead of the Fed. While the data may be more supportive of this, the risk of weakening sterling, an inflationary action in itself, will be one factor it must weigh.”
