Central bank watcher: to infinity and beyond

Central bank watcher: to infinity and beyond

13-09-2019 | Insight

Central banks are delivering on their easing promises, with the ECB having announced open-ended QE. But, monetary policy is not the only game in town.

  • Rikkert  Scholten
    Portfolio Manager
  • Bob Stoutjesdijk

Speed read:

  • Fed continues on a gradual easing path
  • Draghi’s powerful final act 
  • China uses reform to ease financial conditions 

After delivering open-ended QE at the ECB’s September meeting, Mario Draghi’s firm message was that it is now the turn of fiscal policymakers to deliver the next dose of stimulus. And, indeed, while the Fed and PBoC have some scope to cut rates, albeit being reluctant to take meaningful steps, the ECB and BoJ simply do not have much room left for further rate reductions.

Federal Reserve: reluctant cutters

‘Reluctant cutter’ used to be a popular nickname for the Reserve Bank of Australia, when it was easing monetary policy at a snail’s pace in 2015 and 2016. We expect this moniker to gain popularity again, but this time to characterize the Federal Reserve Bank in its current easing cycle. Yes, the first cut was announced in July and there most likely will be another cut in September, but recent Fed comments suggest that the policymaker will administer its doses of easing with continued reluctance.

We expect the Fed to cut rates by another 75 bps, including 25 bps in September. Some further easing should probably be priced in, as risks to that central view are to the downside. Currently, 50 bps in Fed cuts are priced in for the September to December period, and an additional 34 bps for end 2020. For the September meeting we do not expect the Fed to ‘out-ease’ market expectations, or signal such intentions via its Summary of Economic Projections. Hence we see some risk of disappointment in front-end rates around this meeting, but beyond the next meeting we think that risks are tilted towards more easing than is currently being priced in.

European Central Bank: Draghi’s final act

It was no surprise to see ECB President Draghi live up to his reputation at the September ECB meeting by laying out a broad monetary stimulus package that ensures his presidency ends with a bang and not a whimper. Besides a 10 bps cut in the deposit facility rate to -0.50%, the ECB strengthened its forward guidance on policy rates by dropping the previous “mid-2020” calendar guidance and enhancing the state-based link to inflation. It now expects to keep rates at “present or lower levels” until it sees the inflation outlook robustly converge to the target, to the extent that such convergence is reflected consistently in core inflation dynamics. 

The ECB also introduced a two-tier system for reserve remuneration and sweetened the terms on the upcoming TLTRO 3 operations. However, it was the “open-ended” nature of the announced restart of net asset purchases that led to a strong risk-on rally in Eurozone bond markets. Net purchases are expected to continue until “shortly before” the ECB starts raising rates which, in turn, is state-dependent on inflation dynamics: markets currently do not envisage rate hikes happening before 2022. This would imply cumulative net purchases of more than EUR 500bn.

People’s Bank of China: more easing to come

As we predicted in our previous Central Bank Watcher, from July, the PBoC has used the reform of its interest rate framework to lower borrowing costs for the real economy: the loan prime rate (LPR) – from which new loans are priced – is now explicitly linked to medium-term lending facility (MLF) rates. The latter are much lower than the benchmark lending rates with which most existing loans have been priced.

Looking ahead, with growth data remaining unconvincing, with lingering downside risks related to the US-China trade dispute, and with PPI inflation tending to lead the closely watched credit impulse metric, we are fairly convinced that additional monetary stimulus will be forthcoming. 

Bank of Japan: wait and see

The BoJ is expected to maintain the status quo at its next meeting, on 19 September. This applies to all available policy tools, including policy rates, yield targets and asset purchases of ETFs and government bonds. While the ECB has moved towards a new round of monetary easing, with the Fed expected to follow, the trade-weighted yen is holding up very well. We believe this will allow Japanese policymakers to keep their additional easing options in reserve while sticking to their strategy of extended forward guidance, with perhaps a small rate cut somewhere during the next year.

Download the Central Bank Watcher, with our latest analysis of global monetary policy


Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.

Subjects related to this article are:


1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong. 

Please click “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree