When central banks diverge…
UK & Europe – Introduction
Divergence in economic performance and policy is now a key focus and source of volatility for global markets as investors take stock of a widening gap between the Anglo-Saxon economies and other developed nations. Both the US Federal Reserve (Fed) and the Bank of England (BoE) are likely to raise interest rates in 2015, as the US and the UK move into a more mature stage of recovery. But feeble growth and the continued threat of deflation in Japan and continental Europe mean that monetary policy in those economies is headed firmly in the opposite direction.
VIEWPOINT
The gap in policy and prospects between the Anglo-Saxon economies and the rest of the world could be helpful if it helps prolong the US recovery, putting downward pressure on rates and inflation. The risks will come if the US and its currency become the only game in town. We see some advantages in this divergent picture. The US and the UK are less likely to face rising inflation in this scenario, meaning a longer recovery and a slower path to higher rates. At the same time, the relatively greater attractiveness of US assets to global investors could make it easier for the eurozone and Japan to import growth and inflation from the rest of the world, by depreciating their currencies against the US dollar. But there are also risks—for example, if the gap in performance and policy becomes unsustainably wide and the US becomes the only game in town. In this section, we outline the factors driving global divergence and the key potential consequences for economies and markets. The implications for emerging markets and for investor asset allocations are discussed in the other two sections of this edition of WorldView.
