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Central Banks Now Open 24/7 Fighting Currency Wars and Deflation

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People walk past an electronic screen showing television coverage of Raghuram Rajan, governor of the Reserve Bank of India (RBI), speaking during a news conference at the central bank's headquarters, in the lobby of the Bombay Stock Exchange (BSE) in Mumbai.

Photographer: Dhiraj Singh/Bloomberg

Central banks are now open all hours.

Just as they worked weekends through the financial crisis, policy makers are again signaling they can strike at any time for the good of their economies.

Spooked by the threat of deflation, Sweden’s Riksbank became the latest to put investors on alert when it said on Thursday that it’s “prepared to do more at short notice” after cutting its main interest rate below zero and unexpectedly saying it will buy government bonds.

“To ensure that inflation rises towards the target, the Riksbank is prepared to quickly make monetary policy more expansionary, even between the ordinary monetary policy meetings, should the need arise,” it said in a statement.

The world’s oldest central bank is not alone in throwing out its normal agenda. The Reserve Bank of India ignored its calendar of policy meetings to cut its key rate on Jan. 15, while Russia’s central bank increased its benchmark at 1 a.m. on Dec. 16.

The Swiss National Bank announced plans to charge banks to deposit cash with it on Dec. 18, just a week after its quarterly policy meeting, and shocked markets on Jan. 15 when it abolished its currency cap -- again ignoring its own schedule.

Singapore said on Jan. 28 it will seek a slower currency appreciation and the People’s Bank of China also often acts at random times.

Denmark has cut its deposit rate four times this year, though a need to defend the krone’s peg to the euro means it has always acted when it chooses. It chose not to move today, which was a surprise to some economists.

Predictable Policy

The ad-hoc actions undermine the traditional preference of central banks to be predictable and transparent. Indeed, a post-crisis trend has been to use forward guidance as a policy tool in signaling intentions.

The theory goes that if investors can easily forecast the short-term interest rates of central banks, then that will influence long-term borrowing costs too. Financial markets should also be less volatile if policy can be forecast.

So why the switch? One reason is that policy makers are increasingly willing to move when incoming data or market moves challenge their previous outlook, demanding a quick response. Reserve Bank of India Governor Raghuram Rajan shifted a day after evidence mounted that price pressures were diminishing.

Indicating an all-out effort, no matter the time, also helps reinforce the decisions they’ve already made in markets and keeps investors wanting to test them on tenterhooks. Are you really going to buy Danish kroner or dump Russian equities if you know a central bank could suddenly shift policy?

Currency Wars

Perhaps the biggest reason, and why Rob Carnell, chief international economist at ING Groep NV, suspects more surprise shifts to come, is the so-called currency wars.

Most notably, the European Central Bank’s use of quantitative easing has sent the euro sliding, forcing up other currencies in response, especially those elsewhere in Europe. Meantime, the dollar has surged as the Federal Reserve considers raising interest rates.

“Certain big central banks are making moves, leaving a lot of others having to respond on the fly to the implications of those moves,” said Carnell. “They have to keep a step ahead and we’ve seen that on a number of occasions. There will probably be more surprises.”

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