The excess of global inflationary dynamics it is a key risk in our fundamental scenario of a no recession, yet tricky 2019. Indeed, it is likely that central banks will move to a joint way of raising rates, around the world, and that the liquidity pumped into the system after the financial crisis will gradually start to take effect.
Global inflation forecasts are a curious factor in our scenario because a faster rise in inflation than expected may prompt many central banks, including the Federal Reserve, to raise rates much faster than markets priced in. This can lead to tightening financial conditions and, given that the global economy is so highly leveraged, it could even lead to a potential recession.
It's not just the Federal Reserve that wants to remove some of the monetary stimulus in 2019. The European Central Bank (ECB), the Bank of England (BoE), the Bank of Canada (BoC) and the Swedish Riksbank they will likely follow. A big question mark, and therefore a risk, for investors is whether this unintentionally coordinated tightening of monetary policy can have an adverse effect on financial markets and growth. We believe that the focus on monetary tightening will remain strong in 2019, but we also expect a strong sensitivity to any excesses, especially in the case of the ECB.
On a positive note, the ECB has clearly indicated its intentions and is widely expected to end its asset purchase program (APP) at the end of 2019, while it is unlikely to raise rates before the summer. September will be the most likely starting point, with some risk of delay.
However, some factors could force the ECB to review its plans. First, there are signs that the economy may slow down more than expected. This would mean that excess capacity would not disappear as fast as the ECB predicted. Secondly, an escalation of tensions with Italy could negatively affect monetary conditions and growth in the eurozone.
Next year will also see a change at the top of the ECB. Markets will be keeping a close eye on events over the next few months as the next president begins to be watched.
The path of politics Swiss National Bank (SNB) is closely linked to that of the ECB. It is therefore very unlikely that the SNB will raise rates before the ECB, out of fear of the possible impact on the Swiss franc (CHF).
However, with a robust Swiss economy and a continued contraction in the labor market, inflationary pressures could push the SNB into an early hike. We believe, however, that he will do everything to avoid it. To achieve this, it could choose to let the franc appreciate in the short term to reduce imported inflation and offset some domestic inflation, buying some time.
La Bank of Japan (BoJ) it is probably the only other major player that will not reduce monetary stimulus in 2019. Given the absence of sustained inflationary pressures, and with inflation well below target, we believe the BoJ cannot afford to reduce the size of its accommodative measures, and will therefore leave the QE program and the context of intervention on the yield curve unchanged. Furthermore, with the VAT hike planned for next autumn, the BoJ is very likely to prefer the economy to stay warm to better absorb the negative impact of this tax increase.
Nonetheless, we do not rule out the possibility that the BoJ will change its yield curve target due to continued upward pressure on Japanese government bonds at a time when global long-term yields rise. However, the impact such a change would have on the yen will likely prevent such a decision.
As far as the BoE is concerned, in the absence of the uncertainties about Brexit it would have already tightened monetary policy. We expect him to hike rates twice next year, in May and November, if a Brexit deal is found.
