Fed to Raise Rates Each Quarter while BoE Pulls Trigger in August says Deutsche Bank

- German lender upbeat about US economy and see end rate of 3.5%.
- Slow growth from the UK economy and just one rate hike in 2018.
- ECB to reduce stimulus and raise rates more quickly than expected.

© Deutsche Bank

Deutsche Bank, one of the largest forex dealers in the world, has  updated their outlook for monetary policy at the world's four major central banks following their June meetings.

Central banks are significant for currency markets since they are responsible for setting interest rates. Rising interest rates tend to attract greater inflows of foreign capital drawn by the promise of higher returns, which increases demand for the host currency and thus raising its value.

The Federal Reserve (Fed)

The outlook for the Dollar is likely to remain supported by central bank policy. Deutsche says the Fed is likely to raise interest rates 8 times between now and the end of 2019, (4 this year and 4 in the next) to a final level of 3.5%.

They are upbeat about the US economy, saying that it is showing "fast, above-trend growth," that the country is at full employment, inflation is near target and financial conditions are just right. 

They see the Fed's key challenge is not to be too 'trigger-happy' with rate hikes, but rather to maintain a gradual quarterly pace of hiking which is only likely to accelerate should the economy show signs of overheating.

The Bank of England (BOE)

Deutsche's outlook for Sterling may not be as positive, judging from their summary of the BOE. They forecast the BOE to raise interest rates once in 2018, in August, in an "opportunistic" hike if there is a rebound in economic data. Growth is extremely slow in contrast to the US and inflation is going nowhere.

One positive for the economy is that the country is at "full employment" but a negative is that domestic demand is said to have "troughed" and the "external sector is less supportive". 

The key challenge for the BOE is to resolve the paradox of tightening policy with an economy that is growing so slowly. Another key concern will be the fallout from lower investment due to Brexit uncertainty.

The European Central Bank (ECB)

Deutsche's analysis of the ECB's current policy setting suggests a marginally supportive outlook for the Euro.

The Eurozone economy has lost momentum but is still seeing "solid above-trend growth" and the "output gap" - which is the difference between actual and potential economic growth - is also closing.

The threat of trade war with the US and Italian politics are the main challenges for the central bank. Official ECB policy lies at the dovish end of expectations, with an exit from stimulus and no rate hike expected until 2019.

Deutsche expects a slightly more rapid tightening in line with the market, with stimulus reducing in Q4 to 15bn/month from 30bn currently, then ending in 2018, and a (deposit) rate rise not before September 2019.

The Bank of Japan (BOJ)

The Yen is unlikely to be affected by any major changes in BOJ policy over the medium to long-term horizon. The BOJ's current stance is to continue slowly reducing stimulus and to continue targeting yields, which involves buying bonds of different maturities to ensure longer-dated bonds have yields which are higher than shorter term ones.

The idea is that the yield curve remains suitably steep, as this improves trading conditions for financial institutions which can operate more profitably. The hoped-for end result is that these institutions lend businesses more money.

Deutsche says the Japanese economy will continuing to slow in 2018 and inflation will have peaked at 1.0% in the first-quarter. The challenge now is how to stimulate wage inflation and growth. This is despite full-employment and their current policy of basically printing yen and pumping them into the bank via quantitative easing (QE).

Deutsche sees the policy outlook shifting over the next few years to a "discussion.. about changing the policy goal from inflation to nominal growth."

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