Are global central banks heading towards a policy mistake?

SEVERAL major central banks have adopted a more hawkish tone in recent months and appear eager to signal that the great global monetary policy experiment of extraordinarily low rates and global QE is slowly coming to an end. The hawkish shift is likely a result of renewed optimism over the growth outlook - where there are signs of global growth synchronisation for the first time since 2011 - and, in the absence of meaningful inflation pressures, concerns over financial stability.

Financial markets have taken notice of this new tone, as government bond markets globally have witnessed higher yields. The sharp move higher in German bund yields following a recent speech by European Central Bank president Mario Draghi highlights the nervousness in the market and the sensitivity of investors to central bank headlines. After all, it has been almost 10 years since the global financial crisis, and the markets have become addicted to loose monetary policy. This has led to a suppression of volatility across asset classes as investors continue their search for yield. Any signs that policy may become 'less loose' or perhaps 'tight' could trigger a spike in volatility and a return to risk aversion.

Hawkish stance