Monetary policy is changing

Since the global financial crisis monetary policy around the globe has pointed in only one direction: expansion. What started as a traditional (albeit aggressive) easing cycle soon turned into a deluge of unorthodox measures as one crisis followed closely on the heels of another. But times are changing. There are clearly mounting signs that a world-wide process of monetary-policy normalization is beginning. It has recently become ever more apparent how much concern there now is about missing the right time for a trend reversal and thus, in the worst case, about triggering renewed turbulence in the financial markets.

The US central bank has pioneered the new monetary-policy orientation. But the ECB has also embarked on the path towards normalizing its monetary policy, albeit extremely hesitantly. Even the British central bank is thinking out aloud about slowly entering the exit despite all the concern about Brexit. There are undoubtedly still central banks that wish to stick to the present course, but their number is diminishing.

So the global monetary policy framework is beginning to shift: an increasing number of central banks are looking actively at normalization and ever fewer are at all prepared to consider further monetary policy accommodation. Nevertheless, it will not be easy to turn away from the extreme measures of the past few years. Above all, the – in some cases huge – purchasing programs of many central banks have led to significant market distortions that can only be reversed slowly. The central banks are, therefore, changing their communication policy accordingly cautiously and hesitantly. It would appear that initially investors are to be prepared only mentally for the coming change of course without any measures being taken directly. These are likely to follow later when the financial markets have priced in the monetary policy turnaround. As a result volatility in the markets is likely to increase in the next few weeks. After all, the hope of a tightening of monetary policy is likely to be disappointed again several times yet before it really happens.

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