The uneven pace of growth in the developed world is likely to lead to a sharper divergence in monetary policy than most anticipate by the end of 2016. US rates look set to increase further than markets expect, but several central banks elsewhere will probably lower their policy rates more than expected and we think the Bank of Japan and, possibly, the ECB will step up the pace of their asset purchases. Policy easing elsewhere should help the world economy withstand the Fed tightening cycle. Meanwhile, the resulting policy divergence will continue to have a major impact on currency and bond markets.
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