Recent global uncertainties have made it likely that major economies will continue providing 'XXL liquidity' according to Morgan Stanley.
Yet this has implications beyond merely the economies in question (The U.S., The Eurozone) since their act of keeping monetary policy ultra-loose will make it more difficult for other nations to hike interest rates and tighten their own monetary policy, even if those other nations' economies argue for tightening.
Morgan Stanley:
Sovereign headwinds... The events of the past central couple of months have put us firmly back in an environment where major central banks will continue to provide XXL liquidity and early hikers will face the discouraging prospect of dual headwinds: currency appreciation on the back of hikes in policy rates and low bond yields despite it.
..
With these headwinds, the monetary peloton has stretched out more than ever before. When economic recovery in the major economies seemed on track, as many as 13 central banks were expected to raise rates in 3Q10 alone. That number has now fallen to six. The Fed and the ECB have now moved further to the back of the peloton, and the euro area problems have dampened inflation expectations.
Which means we shouldn't expect interest rate hikes from any of the major developed economies until 2011 earliest, and other nations' time tables have been pushed back.
One wonders if this will fuel inflation or further property market appreciation in emerging markets where tightening is warranted but unfortunately delayed due to U.S. and European central banks' inaction on the interest rate hike front.
(Via Morgan Stanley, Global Monetary Analyst, Manoj Pradhan, 26 May 2010)
