Global monetary policy will be locked into a "new neutral" for some time, says Pimco, with the European and Japanese central bankers 'all in' in their attempts to reflate their economies.
Pimco's May Secular Outlook predicted a new neutral baseline scenario for the local bond market.
The new neutral is a world in which central banks will be constrained to set policy rates at levels "well below" those that prevailed in the global financial crisis, Pimco said.
"We continue to see a multi-speed world of economies converging to modest trend growth rates, a view now shared by the International Monetary Fund," the report said.
"We also see a global economy that is no longer restrained by private sector de-levering but, instead, is learning to live with record levels of public and private debt without a cushion that would be provided by more rapid growth or higher inflation than we foresee."
In the eurozone and Japan, Pimco expects neutral real policy rates to be negative over most – if not all – of the secular horizon.
"We judge both the ECB and the BOJ leadership to be “all in” in their attempts to reflate their economies and to be willing to continue unconventional monetary policies for as long as it takes to move as close as possible to their two per cent inflation targets," the report said.
As for the US, Federal Reserve chair Janet Yellen has indicated it could take "several years" for the Fed to complete its forthcoming rate-hike cycle, Pimco said.
"The Fed would also like to shrink its balance sheet by allowing mortgage-backed securities to prepay and Treasuries to mature without replacing them with new purchases in the secondary market," the report said.
On the whole, caution is warranted by investors, Pimco said.
"Low policy rates, expanded central bank balance sheets and high government debt levels mean there is limited scope for policymakers to respond aggressively in the face of business cycle downturns or shocks to investor confidence," the report said.
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