Newsletter Q3 2017 UK

Newsletter Q3 2017

ARE CENTRAL BANKS PURSUING SOUND MONETARY POLICY?

Current and planned monetary measures by central banks may give rise to concerns about investments in real estate. In this article, we provide our take on how upcoming monetary policy changes may impact the market.

By Christopher Elgaard Jensen, Manager, Sadolin & Albæk

not always clear-cut. The figure lists selected factors that are, in theory, affected over time by monetary regulation. Are rate hikes imminent? In the USA, the Federal Reserve is gradually raising interest rates after a seemingly persistent economic recovery with growth in consumer spending and downtrending unemployment rates. Several of the most recent key US economic indicators, however, suggest that the impact on US wage growth has been limited, with inflation staying below the target. For the same reason, the Federal Reserve has proclaimed that it will exercise restraint in terms of the originally scheduled rate hikes if inflationary expectations are not supported by solid key indicators. Indeed, the latest Federal Reserve policy meeting (FOMC) did not prompt further rate hikes, but instead raised expectations of an upcoming sale of the vast bond

Opposing views on the course of monetary policy

One of the most topical issues currently debated by economists in the world’s leading economies is whether central banks are pursuing a sound monetary policy. Monetary policy, which e.g. controls the key policy rate, may be used to influence several key macroeconomic indicators of a country’s economy. Central banks directly control short-term interest rates, whereas they can buy or sell government bonds (quantitative easing or tightening) to influence long-term interest rates directly, in addition to the implicit adjustment that follows from market expectations, also affected by short-term rates. The below figure illustrates how monetary policy may impact the economy. Please note that the figure shows the theoretical effect. In practice, the effect is

Contractionary monetary policy

Expansionary monetary policy

Short-term interest rate is raised Possible quantitative tightening Investments down

Short-term interest rate is lowered Possible quantitative easing Investments up

Spending down Demand down Production down Employment down Inflation down

Spending up Demand up Production up Employment up Inflation up

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