Era of Ultra-Easy Monetary Policy in US, UK may be Extended

Monetary Policy Week in Review: 13-17 October 2014

by Peter Nielsen, Central Bank News

The era of ultra-easy monetary policy in the U.S. and U.K. may continue for longer than expected as central bankers on both sides of the Atlantic last week signaled to financial markets that Europe’s worsening growth prospects could lead to a delay in any tightening.

The first sign of a possible shift in U.S. monetary policy came on Oct. 11 when Fed Vice Chairman Stanley Fischer said weaker-than-expected foreign growth could lead to the Fed to remove accommodation more slowly than otherwise.

Fischer’s comments were followed on Oct. 16 by James Bullard, president of the St. Louis Fed, who said the Fed may delay ending its asset purchases as planned later this month in response to declining inflation expectation in the U.S.

The reaction of financial markets to the comments by Bullard – who won’t be voting on monetary policy until 2016 – were immediate, the latest reminder of just how addicted highly charged financial markets have become to central bank liquidity.

Talk of a “Yellen put” quickly resurfaced in media with Fischer and Bullard’s remarks seen reflecting a more general view among members of the Federal Open Market Committee (FOMC). A “Yellen put” is a reference to the belief that the Fed under its new chair will continue the policy known as the “Greenspan Put” and the “Bernanke Put” and ultimately intervene to put a floor under prices if markets suddenly go into freefall.

The next day, Oct. 17, it was the Bank of England’s (BOE) turn to reassure financial markets that it too was sensitive to “gloomier” global growth prospects, as its chief economist, Andrew Haldane, said in a speech and to the ITV television network.

Haldane said the downturn in global growth prospects and lack of inflationary pressures meant that he was now less likely to vote for a rate increase than three months ago and the BOE could wait longer before raising rates.

As in the U.S., financial markets immediately pushed back the time frame for when they expect the BOE to raise its rates for the first time July 2007.

U.K. rates are now broadly expected to be raised in September 2015 rather than May while the first hike in U.S. rates is now seen by markets in the fourth quarter of 2015 rather than around the middle of the year.

In Europe, the focal point of financial markets’ worry over slowing global growth, there were signs that politicians finally grasp the urgent need to help the European Central Bank (ECB) in reviving stalling economic growth.

German Finance Minister Wolfgang Schaeuble told the Welt am Sonntag newspaper that investments to improve competitiveness had to be increased quickly, echoing the International Monetary Fund’s appeal for advanced economies to boost potential growth, partly by investments in ageing infrastructure.

But Schaeuble also showed why it is so agonizingly difficult for the euro area to overcome “eurosclerosis” – a term created in the late 1970s to describe the excruciatingly slow pace of economic and political integration along with the sluggish pace of economic growth. Schaeuble said any investments to improve Germany’s energy grid, roads or railways will not change the government’s promise to balance its budget next year for the first time since 1969, a commitment that severely limits its ability to stimulate demand. The message from those central banks that deliberated policy last week echoed the concerns of the Fed and BOE, with inflation generally declining along with growing downside risks from the global economy.

As in recent months, central banks worldwide are closely following the possibility of increased volatility in global financial conditions from the shift in U.S. monetary policy, a factor that was particularly noted by the Bank of Korea, the Bank of Uganda, the National Bank of Serbia, the Central Bank of Egypt, the Bank of Chile and the Bank of Mozambique.

Last week also witnessed expected rate cuts by the central banks of Korea and Chile in response to weak economic activity. Through the first 42 weeks of this year, the 90 central banks followed by Central Bank News have cut their policy rates 53 times, or 13.8 percent of all policy decisions, up from 12 percent at the end of the first half and 12 percent at the end of the first quarter. Central banks in advanced economies have accounted for six of the rate reductions, with Israel cutting its rate three times, the European Central Bank twice and Sweden once. Following last week’s rate cuts by Chile and South Korea, emerging market central banks have cut rates 24 times, just under half of all the rate cuts worldwide as the slowdown in Europe and China takes a bite out of their exports.

Meanwhile, rates have been raised 38 times, or 9.9 percent of all policy decisions, up from 9.3 percent at the end of June and 8.7 percent at the end of March.

Among advanced economies, only New Zealand has raised its rate four times while emerging market central banks have raised rates 18 times, frontier market central banks three times and other central banks 12 times. LIST OF LAST WEEK’S CENTRAL BANK DECISIONS:

• Singapore maintains policy, sees moderate expansion
• Uganda maintains rate as inflation, growth on target
• Korea cuts rate 25 bps on weaker inflation pressures
• Serbia holds rate, pursues cautious policy due to risks
• Egypt holds rate, sees risks from Europe, emerg. markets
• Chile cuts rate 25 bps, changes depend on inflation
• Sri Lanka holds rates, inflation seen lower than forecast
• Mozambique holds rate, confident will hit inflation aim

TABLE WITH LAST WEEK’S MONETARY POLICY DECISIONS:

THIS WEEK (Week 43) five central banks or monetary authorities are scheduled to decide on monetary policy: Namibia, Canada, the Philippines, Turkey and Norway.

TABLE WITH THIS WEEK’S MONETARY POLICY DECISIONS:

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