The global economy started 2014 off with moderate strength. Since then, its status has been downgraded to moderately weak. Entering 2015 with this background, there’s one question investment bankers certainly have on their mind. Which of the big 6 central banks will cause investment bankers the most heartburn in 2015? Let’s take a look.
European Central Bank (ECB)
The ECB appears the most dovish of all the major central banks. It has been six years of loose monetary policy in the Old World (September 2008 was when the ECB first made it’s move).
Recent indications from ECB President Draghi continue the uber-dovish tendency, indicating that the ECB will likely take steps to expand its balance sheet. The ECB’s balance sheet expanded quickly from May 2011 to June 2012. Since then, the ECB has watched its balance sheet decline by about 100% (dropping from +178% in June 2012 compared to January 2007 to 78% in September 2014).
The continued weak nature of the ECB certainly puts the ECB close to the top of concerns for investment bankers, but in this case, the concern is most likely a positive concern. Investment bankers as a group generally want weaker monetary policy.
Federal Reserve (Fed)
Akin to the ECB, the Fed has been incredibly dovish since August 2007 (the month the Fed started lowering its main policy rate). In addition to questionable policy motivations behind historically low interest rates, the Fed has also been quite active in expanding its balance sheet. Since January 2007, the Fed’s balance sheet is up about 415%.
The question now is – will the Fed be able to raise rates before implementing further balance sheet expansion (i.e. QE 4)? The (perhaps futile) debate about when the Fed will raise rate certainly puts Ms. Yellen and members of the Federal Reserve Open Market Committee close to the top of central banks that investment bankers should be worried about.
People’s Bank of China (PBOC)
The PBOC has been much more prudent in manipulating short-term interest rates and expansion of its balance sheet, with its balance sheet up “only” 125% compared to the Fed’s 415%.
Interestingly, the PBOC has become markedly more weak in its policy stance, recently lowering its main policy rate from 6% to 5.6%. The somewhat surprising policy rate change coincided with some announcements on expanding its balance sheet in minor ways.
With PBOC flipping to a dovish stance, the PBOC is unlikely to give investment bankers much to worry about, unless, of course, strong price appreciation materializes.
Bank of Japan (BOJ)
Akin to the ECB and PBOC, the BOJ recently shifted to a quite more dovish view. This view, no doubt, stems from two consecutive quarters of negative GDP growth. With the BOJ unlikely to give any attention to normal monetary policy in 2015, the BOJ will likely be an afterthought for the world’s central bankers this coming year.
Bank of England (BOE)
Akin to the Fed, the BOE has been quite active at expanded its balance sheet during the financial crisis. Additionally, the BOE has been implementing loose monetary policy since September 2008.
With no indications out of BOE that rates are to rise any time soon, BOE’s monetary policy situation is unlikely to garner much attention in 2015, barring any surprises.
Of the six major central banks, the Central Bank of Russia has raised rates significantly recently, with its main policy rate rising from 5.5% in February 2014 to 8% currently. The rise, of course, stems largely from a concern about foreign capital flight due to the situation between the Eastern power and Ukraine.
The question with Russia is – how much might does it want to employ in dealing with western aggression?
Contrasting the Six Central Banks
Which of these 6 central banks are most likely to cause the most heartburn for the world’s central bankers?
Of the 6 mentioned, only two are even considering raising interest rates – Russia and the U.S. Which is most concerning? This subjective question, of course, has no answer.
On the one hand, the U.S. is the second largest global economy with the most used currency on the globe. Any mistakes from Federal Reserve bankers could send the U.S. into a recession, or at least weaken the mighty power akin to the weakness the European economies are experiencing.
On the other hand, Russian policy could severely weaken European growth (simultaneously hurting itself, of course). The ruble is nowhere near as powerful as the dollar, placing greater weight on American policy when viewing the question through this lens.
Overall, the answer to the question is left to the reader.
The global economy will enter 2015 with an elevated level of uncertainty about the strength of the global economies. If things go according to indications out of the central bankers right now, it may very well be the Americans that make investment bankers the most displeased, although the Russians certainly have a say as well.