Europe’s leading central banks returned to crisis-fighting mode, expanding a push by global monetary-policy makers to support economies and financial markets while fiscal authorities struggle to act.
The European Central Bank, after a meeting yesterday in Berlin, said it would reintroduce purchases of covered bonds and yearlong loans for banks to support markets rattled by the region’s sovereign-debt crisis. In London, the Bank of England boosted its asset-purchase program by more than a third to 275 billion pounds ($424 billion) in a bid to avert a new recession in the U.K.
International central bankers are softening their anti-inflation stances or reviving programs to keep financial systems liquid as they race to keep slumping growth from turning into a full-fledged contraction. The Federal Reserve has eased policy two months in a row, while central banks in Malaysia and South Korea have refrained from raising rates as they focus on maintaining growth over damping price increases.
“There has been a recent shift in central banking across the world, in the West toward easing and in emerging markets putting tightening on hold with an option to ease if necessary,” said Gerard Lyons, London-based chief economist at Standard Chartered Bank. The fiscal and monetary policy “cupboard is almost bare in the West, so pressure is on the central banks to do more of the heavy lifting.”
Australia’s central bank signaled Oct. 4 it has scope to lower the highest benchmark interest rate among developed economies if necessary as inflation pressures ease. Turkey and Russia stepped up sales of foreign-currency reserves this week.
“We have a substantial increase in risk aversion, and that is affecting flows into the emerging markets and their economies,” said Ted Truman, a former Fed official and assistant Treasury secretary, who’s now a senior fellow at the Peterson Institute for International Economics in Washington. “Many of their currencies are weakening, and there’s a recognition that the global economy which they live off of is slowing down.”
Brazil plans moderate interest-rate reductions after a surprise cut Aug. 31 to 12 percent, a government official familiar with monetary policy said this week on condition of anonymity. Last week, Israel’s central bank lowered its benchmark rate for the first time in 2 1/2 years, to 3 percent.
The Fed said last month it would replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in a program dubbed Operation Twist. In August, the central bank said its benchmark interest rate would probably stay near zero through at least mid-2013, amending previous language for a less-specific “extended period.”
Additional easing may be in the offing. JPMorgan Chase & Co. economists last week forecast the average interest rate of developed economies, weighted for gross domestic product, will fall to 0.62 percent by the end of the year from 0.80 percent. In emerging markets, it will drop to 5.80 percent from 5.93 percent.
“We’re going to see further measures,” said Tim Drayson, a global economist at Legal & General Investment Management in London. “There’s clearly more scope for the Fed for going to QE3, and the ECB can cut rates,” he said, referring to a third round of quantitative easing, or large-scale asset purchases.
The euro reversed losses after the ECB’s rate decision to rise 0.7 percent to $1.3437 at 5 p.m. in New York. The pound lost 0.1 percent against the dollar to $1.5445. The Standard & Poor’s 500 Index of stocks rose 1.8 percent to 1,164.97 at 4 p.m.
ECB President Jean-Claude Trichet, overseeing his final monetary-policy decision before retiring, said at a Berlin press conference yesterday that the central bank will spend 40 billion euros ($54 billion) on covered bonds starting next month and will offer banks two additional unlimited loans of 12 and 13-month durations. He also said the ECB will continue to lend banks as much money as they need in its regular refinancing operations at least until July 2012.
Policy makers left the benchmark interest rate at 1.5 percent, where it’s been since July 7. With inflation accelerating to 3 percent last month, the ECB is resisting calls to reverse this year’s two quarter-point rate increases even amid speculation a recession is impending, Greece edges toward default and investors express concern about potential European bank losses. The ECB is the first line of support for markets as European governments piece together a new plan to solve their region’s debt strains.
‘Intensified Downside Risks’
“Ongoing tensions in financial markets and unfavorable effects on financing conditions are likely to dampen the pace of economic growth in the euro area in the second half of this year,” Trichet said. There are “intensified downside risks” to the economic outlook, he said.
The Bank of England’s nine-member Monetary Policy Committee, led by Governor Mervyn King, raised the ceiling for so-called quantitative easing from 200 billion pounds. That’s the biggest expansion since the first round of stimulus in March 2009. Only 11 of 32 economists in a Bloomberg News survey predicted an increase in asset purchases.
The central bank acted a day after a report showed Europe’s second-biggest economy grew less than previously estimated in the quarter through June.
The pledge to buy the most bonds since the depths of the credit crisis shows King and his colleagues are prioritizing the recovery over the threat from inflation, which is running more than double the central bank’s target. The onus to boost expansion is on Bank of England as the nation’s government remains committed to delivering the toughest fiscal squeeze since World War II.
Not every country is considering easier monetary policy. Vietnam’s central bank yesterday said it would lift its refinancing rate by a percentage point to 15 percent. The Central Bank of Kenya raised its benchmark interest rate this week by four percentage points to 11 percent.
Other emerging market central banks have room to join developed economies in providing stimulus if growth falters, said Lyons at Standard Chartered Bank. The People’s Bank of China has raised interest rates five times and increased the reserve requirement nine times in the past 12 months, slowing growth in the world’s second-largest economy behind the U.S.