Signs say easy money won’t get harder soonThe era of easy money is shaping up to keep going into 2014.
The Bank of Canada’s decision on Wednesday to drop language about the need for future interest-rate increases unites it with other central banks that are reinforcing rather than retracting loose monetary policy. The Federal Reserve delayed a pullback in its monthly asset purchases, while emerging markets from Hungary to Chile cut borrowing costs in the past two months.
“We are at the cusp of another round of global monetary easing,” said Joachim Fels, co-chief global economist at Morgan Stanley in London.
Policy makers are reacting to another cooling of global growth, led this time by weakening in developing nations while inflation and job growth remain stagnant in much of the industrial world. The risk is that continued stimulus will inflate asset bubbles central bankers will have to deal with later. Already, talk of unsustainable home-price increases is spreading from Germany to New Zealand, while the MSCI World Index of developed-world stock markets is near its highest level since 2007.
“We are undoubtedly seeing these central bankers go wild,” said Richard Gilhooly, an interest-rate strategist at TD Securities in New York. They “are just pumping liquidity hand over fist and promising to keep rates down. It’s not normal.”
Normal or not, that’s been the environment now for five years after monetary authorities fought to protect the world economy from deflation and hasten its recovery. In the advanced world, central banks drove interest rates close to zero and ballooned their balance sheets beyond $20 trillion through repeated rounds of bond purchases, a policy known as quantitative easing.
The economic payoff has been limited.
The International Monetary Fund this month lopped its forecast for global economic growth to 2.9 percent in 2013 and 3.6 percent in 2014, from July’s projected rates of 3.1 percent this year and 3.8 percent next year. It also sees inflation across rich countries already short of the 2 percent rate favored by most central banks.
Central bankers are on guard to keep low inflation from turning into deflation, a broad-based decline in prices that leads households to hold off purchases and companies to postpone investment and hiring.
“There is a concern at central banks that what we’re seeing is another false start in their economies,” said Michala Marcussen, global head of economics at Societe Generale SA in London. “We now need to see two to three months of better numbers before they’re willing to contemplate an exit again.”
Moving to tighten before the Fed is ready to trim its bond buying would drive up currencies against the dollar, to the detriment of exports, said Derek Holt, vice president of economics at Bank of Nova Scotia in Toronto.
“There’s an easy-money bias across global central banks that probably will persist until about March or April,” said Holt. “The Fed’s decisions complicated the exit strategies for a lot of central banks.”
If the Fed’s delay extends the decline in the dollar, then the Bank of Japan and the European Central Bank also are more likely to add fresh stimulus, Fels said in an Oct. 20 report. The ECB is likely to offer banks another round of cheap, long-term loans in the first quarter, while the BOJ may ease more to offset a 2014 consumption tax increase, Citigroup economists said in a report yesterday.
The dollar has declined 1.1 percent against a basket of 10 leading global currencies in the last month.
Some central banks in emerging markets are already acting. Chile unexpectedly lowered its benchmark rate by a quarter point to 4.75 percent on Oct. 17, pointing to weaker growth, inflation and the global outlook. Israel on Sept. 23 surprised analysts when it cut its key rate a quarter point to 1 percent, the lowest in almost four years.
“With the dollar much weaker in recent days and weeks, you’ll see central banks that were reluctant to ease start to do that now,” said Thierry Wizman, global interest rates and currencies strategist at Macquarie Group in New York. “They can be less worried about capital flight if the Fed isn’t tightening policy.”
Hungary, Latvia, Romania, Serbia, Sri Lanka, Egypt and Mexico have also eased since the start of September, although Indonesia, Pakistan, Uganda and India tightened, with the latter softening the blow by relaxing liquidity curbs in the banking system at the same time.