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Please find attached the January 2018 edition of the IGM Monthly Interest Rate Outlook.


In general, central banks are either already tightening policy or veering this way. The aim is not necessarily to dampen inflation, but keep the status quo. There simply is not the need for the volume of economic liquidity currently in the system. How the financial markets react is uncertain given the uncharted waters of a global balance sheet shrinkage.

  • One such issue is the short volatility trade which Senior Editor Marcus Dewsnap considers [Pages 2-4]. There is a risk that the stability of low vol, which is feeding itself, might in the face of a significant shock induce the sort of instability of a decade ago � who didn't read Minsky?
  • The BoJ is yet to signal any move towards normalizing policy. Governor Kuroda's term ends in April. The latter and YCC tweaks are the focus in the year ahead. Asia FX Analyst Jian Hui Tan suggest the signal for tweaks will be when the BoJ reduces purchases in the 3-5 and 5-10 year segments at the regular bond purchase operations [Pages 5, 8].
  • Meanwhile, normalization gathers pace at the BoC with FX Analyst Mark Mitchell echoing market sentiment that there is a high probability of an imminent rate hike as the economic outlook improves [Pages 5, 10-11]. This, as Technical Analyst Matthew Sferro suggests, will raise Canadian benchmark yields [Pages 5, 22].
  • At the Czech National Bank, Emerging Market Managing Analyst Chris Shiells writes, the question heading into the first meeting of 2018, is whether the CNB will hike rates by 25bp having held off in December. Then it is all about the pace of tightening for the rest of the year.

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