In the immediate future, we do not necessarily see any risks arising from the current, very slow pace that central banks in major developed economies are taking towards normalising monetary policy.

A slower rate of policy unwinding means that interest rates will likely be rising by less than investors had been expecting and hence there should be fewer worries about significant losses in fixed-income portfolios as a result of policy tightening. As for equities, markets generally welcome lower interest rates and indeed, so far markets have reacted positively to the gentle pace adopted by central bankers.

There are, however, two potential downsides. One reason for central banks moving slowly is that inflation has disappointed. While there is little concern about deflation, the question remains as to whether central banks in the US, eurozone and Japan will ever be able to meet their inflation targets. This is modestly negative for equities as revenues will be rising more slowly.

A second reason to worry about slower unwinding is that economic growth is not as strong as hoped, which ultimately feeds into corporate earnings and hence equity and corporate bond prices. ‘Secular stagnation’ is still a longer-term theme and central bank caution reflects this.

For more expert reflections on central banks’ road to ‘normalisation’, click here.