The Reserve Bank of Australia’s February rate cut wasn’t at all surprising given recent domestic inflation numbers came out right on its inflation target.
Going forward we expect the language to change to an outright cutting bias.
Bond investors have just had a new world opened to them; one where they benefit from central banks aggressively cutting rates and sliding commodity prices.
The recent panic moves from central banks around the world feel like useless attempts to hold back the disease of deflation crossing their borders. We know this is only the start of their efforts, because once deflation takes hold and starts affecting expectations, it will be very, very difficult to eradicate.
There may be even bigger problems down the line for developed economies with high debt loads like Japan, the United States and the United Kingdom. Falling inflation leads to climbing real interest rates.
What’s an investor to do?
We are on the verge of a clear regime change in how the world thinks about monetary policy and the recent events will be only a teaser to what we will see over the next 10 years.