Notwithstanding the Bank of Canada’s pledge to keep rates unchanged trough the second quarter of 2010, economists from Morgan Stanley predict that the central bank will begin tightening in the first quarter next year.
“While financial markets keep feasting on the global liquidity glut, there is a subtle but undeniable shift underway in the central bank community towards eyeing not only the end of easing, but the beginning of tightening,” Morgan Stanley says in a research note.
The firm reports that its central bank watchers expect the U.S. Federal Reserve Board, the European Central Bank and the Bank of England, “to start nudging rates higher only from around the middle of next year, and the Bank of Japan to even ease policy further. However, several other G10 and emerging market central banks look set to tighten policy over the next three-six months.”
Among those that it expects to begin tightening in Q1 next year is the Bank of Canada. The firm predicts that Norway’s Norges Bank and the Reserve Bank of Australia will raise rates before the end of the year, joining Israel’s central bank, which has already raised rates.
“Only Hungary and Romania are expected to reduce rates further in Q1, while five other central banks are forecast to follow Israel, Norway and Australia into tightening policy. Besides the Bank of Canada and the Czech National Bank, our team is looking for three Asian central banks to start a tightening cycle, namely the central banks of India, Korea and Taiwan.”
“While we expect most major central banks to start raising rates only from [Q2 2010], it appears quite likely that central bank rhetoric will become gradually more hawkish (or less dovish) over the next several weeks and months,” it says. “Taking their cue from such rhetoric, markets will likely price in hikes in policy rates, thus implicitly helping to tighten policy well before rates are actually raised.”
“Slowly but surely, the global monetary policy cycle is turning,” Morgan Stanley concludes. “True, the transition we see next year is only one from a super-expansionary policy stance to a still-very-expansionary one. However, as more and more central banks start to hike rates over the next 3-6 months and others – while still sitting on their hands – start to sound more hawkish, the market consensus that all will continue to be well on the liquidity front could easily be challenged in the period ahead.”
IE