Normalisation of monetary policy : prospects and divergences

Although the world’s leading central banks are currently still conducting a decidedly expansionary monetary policy, it can be assumed that, sooner or later, that policy will be tightened. In view of the divergent macroeconomic situations and prospects, the normalisation of monetary policy is likely to be asynchronous. The Federal Reserve’s preparations for this normalisation are now far advanced, with the estimate of excess capacity on the labour market and the likely pressure on wages and prices as crucial elements for determining the timing and pace of the exit. In the euro area, the monetary policy stance is expected to remain extremely accommodative in a climate of very low inflation which appears to be weakening the anchoring of inflation expectations to some extent. A challenge for the exit from the current policy stance is the implementation of a more restrictive monetary policy by means of higher interest rates, while the central bank reserves still contain a substantial liquidity surplus. In that connection, the Federal Reserve has now felt the need to expand its operational framework with a supplementary interest rate floor, namely the overnight reverse repo rate, in order to ensure the optimum transmission of the policy rates to market interest rates. Asynchronous normalisation of monetary policy in the major advanced economies implies risks of undesirable spillover effects. The increased synchronisation in government bond yield movements shows that the euro area could well feel the impact of any potential turmoil associated with the normalisation of monetary policy in the United States. However, it is evident that, since the end of 2013, the Eurosystem has been successful in clearly establishing the independence of its monetary policy and is managing to devise a monetary policy course in line with the euro area’s fundamentals. That is also apparent from the movement in the exchange rate since mid-2014.