Between 2009 and 2020, major central banks provided unprecedented support global economy by buying public and private assets – quantitative easing (QE) – and encouraging other liquidity injections. Although the economic benefits of subsequent rounds of quantitative easing are debatable, this policy prevented repeated crashes in financial markets and helped defuse the 2008–2012 balance sheet crises in USA and to Europe.

Although the economic reality is much more complex, a new dogma has emerged. Quantitative easing was not just one of many supportive factors that encouraged the purchase of risky investment products, it was a key factor. This belief has led to widespread fears that this logic will be counterproductive, i.e. that the stock and bond markets will collapse as soon as central banks begin to wind down their quantitative easing program.

By forcing central banks to tighten monetary policy, rising inflation over the past 18 months is challenging the prevailing view that a) markets have become a function of central bank balance sheets and b) that Western economies can no longer tolerate business as usual in rate levels without serious pressure. Although the past year has been tough, since October it has become clear that markets can rise even with less support from central banks. The combined US dollar balances of the four major central banks hit their highest level last year in May. Since then, their total assets have fallen by 6%. Even before central bank balance sheets peaked, global stocks were down 18% (based on the global Dow Jones) from December 2021 highs following Russia’s invasion of Ukraine. International stocks then fell another 12% by mid-October as the economic outlook deteriorated. However, since October’s bottom, equities are up about 18% despite continued easing in central bank balance sheets.

Finally, in our view, the link between risk-prone commodities markets and central bank balance sheets has never been as strong as it seems. The somewhat parallel upward trend in financial markets and central bank assets shows that all things tend to increase in nominal terms over time.

*Economists of Berenberg Bank.