Central Banks Keep Easing After Cuts Fail to Spur Growth
Global central bankers are poised to ease monetary policy even further after a wave of interest-rate cuts from India to Poland.
As Group of Seven finance chiefs gather in the U.K. today with monetary policy on their agenda, economists at Morgan Stanley and Credit Suisse Group AG are among those predicting policy makers will keep deploying stimulus amid weak global growth, slowing inflation and the need to thwart currency gains.
“Most central banks in our coverage universe still have a bias to ease,” Morgan Stanley economists led by London-based Joachim Fels said in a report to clients yesterday. “Given this disposition, it doesn’t take much in terms of downside surprises in growth or inflation to tip the balance for more central banks to pull the trigger for more easing.”
South Korea’s rate cut yesterday was the 511th reduction worldwide since June 2007, according to Bank of America Corp.’s tally, done before Vietnam and Sri Lanka today said they’re lowering their policy rates. While the liquidity has sent stock markets surging, it has yet to prove as effective in generating economic growth.
“Central banks are our best friends not because they like markets, but because they can only get to their macro objectives by going through the markets,” Mohamed El-Erian, chief executive officer at Pacific Investment Management Co. in Newport Beach, California, said in a May 8 telephone interview. “The hope is that improving fundamentals will validate what central banks have done.”
Equities are rallying amid the easy monetary policy. The Standard & Poor’s 500 Index (SPX) set a record level this week and the Dow Jones Industrial Average last week climbed to 15,000 for the first time. In Europe, stocks have also risen and even the yields on the 10-year notes of crisis-torn Greece have slipped below 10 percent. Meantime, Japanese stocks also jumped today as the yen weakened beyond 101 per dollar for the first time in four years.
The G-7 meeting is “an opportunity to consider what more monetary activism can do to support the recovery, while ensuring medium-term inflation expectations remain anchored,” U.K. Chancellor of the Exchequer George Osborne said in a statement today.
The Bank of Korea lowered its benchmark to 2.5 percent from 2.75 percent. That surprise shift followed an unexpected reduction from Poland’s central bank to an all-time low of 3 percent. Sri Lanka today took its two main rates down by half a percentage point, surprising economists surveyed by Bloomberg News, while the Vietnamese central bank’s refinance and discount rates will drop 1 percentage point each on May 13.
The Reserve Bank of Australia cut to a record 2.75 percent this week, while the European Central Bank and Reserve Bank of India acted to ease last week. Although the Bank of Japan and the U.S. Federal Reserve refrained from changing policy at their last meetings, the BOJ doubled its monthly bond purchases in April and Fed policy makers last week raised the prospect of increasing their pace of bond buying above $85 billion a month.
The Bank of England likewise refrained from adding to stimulus yesterday, keeping its target for asset purchases at 375 billion pounds ($581 billion) and its interest rate at 0.5 percent.
Behind the stepped-up stimulus: Another swoon in the global economy barely five years after it fell into its deepest recession since World War II. A Citigroup Inc. gauge shows economic data in major economies began coming in below forecasts in the middle of March and the index is now near its weakest since last August.
With commodity costs in decline, the lackluster growth is also weakening inflationary pressures, forcing central banks to protect against further disinflation. JPMorgan Chase & Co. economists predict global inflation will fall to 2.3 percent in the current quarter, from more than 3 percent at the start of 2012.
As Japan’s (BOJDTR) monetary easing drives down the yen, nations including Australia, New Zealand and Switzerland are also moving to counter climbing currencies before they hurt their exporters. Sweden’s Finance Minister Anders Borg said May 7 that the central bank should consider the strengthening krona.
Maxed-out budgets mean governments are also struggling to aid their economies, with those in Europe having to ease their austerity drive. U.S. Treasury Secretary Jacob J. Lew will tell the G-7 that nations should focus on spurring domestic demand, according to a Treasury official.
“Taken together, global factors seem to have become more relevant for central banks,” the Morgan Stanley economists said. “There is likely more to come from various central banks.”
Fels’s team at Morgan Stanley says that the ECB (EURR002W) may move anew after President Mario Draghi said “we are ready to act again” if necessary, and that the Bank of England may try to ease more once Mark Carney becomes governor in July. Elsewhere in the world, Morgan Stanley sees added rate cuts in Australia, Poland, Turkey, Israel, Russia and maybe Hungary.
In Asia, Credit Suisse economist Robert Prior-Wandesforde told clients yesterday that India and Taiwan may deliver more easing and that the Philippines may reduce the rate it pays on special deposit accounts. There is also an increasing likelihood that China could cut borrowing costs soon, according to Australia & New Zealand Banking Group Ltd.
Less sure is Paul Donovan, global economist at UBS AG in London, who says major central banks either have no need to act again -- as in the case of the Fed -- or will stand pat because they are having little effect -- as with the ECB. The Frankfurt-based ECB will refrain from cutting rates until at least 2015, according to the median of 18 forecasts in a survey of economists.
“We’re probably not static exactly, but the momentum for further easing is inevitably slowing,” Donovan said.
Some central bankers are also signaling irritation with having to drive the recovery effort unassisted. Philadelphia Fed President Charles Plosser told Bloomberg Television yesterday that it is “disturbing” to him that “more and more is being expected of central banks.”
“We are expected to solve all the world’s problems,” Plosser said. “Our fiscal authorities are not doing a very good job in any country.”
Plosser, who doesn’t vote on the policy-making Federal Open Market Committee this year, has called for the Fed to slow its pace of bond buying. The FOMC voted last week to press on with purchases and raised the possibility of increasing them in response to changes in the labor market or inflation.
While he called the Fed’s easing “the most inappropriate monetary policy in the world,” billionaire hedge-fund manager Stanley Druckenmiller said May 8 that “there are no conditions currently for a major bear market.”
A Fed panel of bankers warned policy makers in February that their aid for the economy was pushing financial institutions to take on more credit risk and creating a “bubble” in the price of U.S. farmland, according to minutes of the meeting obtained this week by Bloomberg News.
Even with such exuberance, central banks may still fail to rally the global economy beyond a growth rate of 3 percent, below the average of as much as 4 percent in the years before the financial crisis, said Andrew Kenningham, an economist at Capital Economics Ltd. in London.
Fiscal contraction, the need for households and companies to pay off debts and Europe’s broken banking system will offset the easier monetary policy, he said.
The market moves put further pressure on central banks to manage their communications when they do start to withdraw their support for the economy, said Julian Callow, chief international economist at Barclays Plc in London.
“This is like you’re a child on a roundabout spinning around, you can’t suddenly stop this, you have to phase in the exit,” said Callow. “They are really dominating markets, and there’s a real danger they could disrupt them even with what might seem moderate moves.”
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