The divergence in monetary policy across developed markets since the beginning of 2018 is starting to breakdown as Fed and ECB easing makes it increasingly difficult for the hawkish hold-outs to tighten. Above-target inflation in 2018/early 2019 provided cover for the Scandinavian and Canadian central banks to gingerly raise policy rates and wean the economy off emergency liquidity support. However, with inflation falling across the board and smaller economies particularly powerless against global economic headwinds, developed-market monetary policy will once again converge. In all cases where OIS data is available, markets expect developed-market central banks to have eased policy by end of 2020.

Among the smaller developed markets, New Zealand fired the first salvo back in August with a surprise 50bps cut, while more recently the Riksbank has been forced to dial back its forecast policy rate tightening (while still expecting to hike this year or early 2020). Even Norges Bank, which is still in tightening mode, will find it increasingly difficult to resist a policy reversal given the collapse in inflation since early 2019.

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Source: Bloomberg, Macrobond, Variant Perception