LONDON (Reuters) - Next year will be the first since 2006 that there will be no big monetary policy easing across the world's leading industrialized nations, signifying the end of the 35-year bull market in bonds, Bank of America Merrill Lynch said on Monday.
Having driven interest rates to their lowest ever levels and lifted purchases of financial assets to over $25 trillion this year, central banks are finally maxed out, BAML said in its 2017 outlook.
Any stimulus to the world economy will now come from governments, who will use fiscal policy to wage a "war on inequality", according to BAML.
"The era of excess central bank liquidity is ending. In 2017 markets likely will not benefit from a big monetary easing for the first time since 2006," BAML's investment strategy team led by Michael Hartnett in New York said in on Monday.
They reckon the Federal Reserve will raise U.S. interest rates and expect the European Central Bank and Bank of Japan to row back on their negative rate policies which resulted in more than $13 trillion of government bonds boasting a negative yield this year.
"Interest rates and inflation will surprise to the upside," they said, predicting an acceleration in nominal U.S. growth to 4 percent from 3 percent and non-U.S. growth to 7 percent from 6 percent.
Central banks around the world have cut interest rates nearly 700 times since Lehman Brothers collapsed in 2008, according to BAML.
Reuters calculations show that since the beginning of 2015 alone, 59 central banks have eased policy 214 times. Seventeen monetary authorities have made their first moves this year.
According to BAML, this year marked peak liquidity, peak globalization, peak inequality and peak deflation.
Next year, assets that have benefited from the deflation trade and global zero interest rate policy (ZIRP) will be among the biggest losers, while assets sensitive to inflation, Main Street and fiscal largesse will do well.
Bonds will suffer most, while bank stocks, inflation-linked bonds and shares in U.S. homebuilders will outperform, BAML said.
(Reporting by Jamie McGeever; Editing by Toby Chopra)