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Central banks' endgame: a new policy paradigm
Wednesday 18 October 2023
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Central banks' endgame: a new policy paradigm
October 2023 | While COVID-19 led to a significant acceleration in central bank asset purchases to address pandemic-related lockdowns and disruptions to economic activity, the unexpected rise in inflation has prompted central banks to tighten monetary policy, first by tapering their asset purchases, then primarily through higher interest rates. Now that the policy rate hiking cycle could be almost over, attention could turn to central banks' balance sheet policies. Balance sheet normalization and prolonged government budget deficits imply a shift to an environment that will make bonds more attractive over time and increase the (risk-adjusted) required returns for other major asset classes.
01 | Major central banks in advanced economies are continuing the reduction of the large balance sheets acquired since the Great Financial Crisis (GFC).
02 | The Federal Reserve, European Central Bank and Bank of England have embarked on a path to normalize their balance sheets by reducing their asset holdings - primarily in the form of government debt.
03 | This could be part of a paradigm shift from an accommodative policy stance that has supported financial asset prices to an environment that will make bonds more attractive over time and increase the required returns for other major asset classes.
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