INSUBCONTINENT EXCLUSIVE:
Slowly, but surely, central banks around the world are unwinding the easy money they spent a decade injecting into the global economy to
fight the fallout from financial crises and recession.
Already this year, the Federal Reserve raised its key interest rate twice and the
European Central Bank declared it would cease buying assets in December
Stung by investors, emerging market central banks such as Turkey and Argentina have tightened monetary policy even more aggressively.
Not
all are turning more restrictive
The Bank of Japan is maintaining massive stimulus and the People’s Bank of China is still leaning toward loose policy.What policy makers
do next in 2018 is sure to be a driver for financial markets, long supported by the flood of cheap cash
Bloomberg Economics took a look at the top central banks
We outline what they’ve done so far this year and attempt to analyse what they will do next.
US FEDERAL RESERVEThe Fed is gradually
raising interest rates to keep inflation under wraps, following a decline in unemployment to the lowest levels since 2000
Chairman Jerome Powell and his colleagues have hiked twice so far this year and signaled two more increases in 2018
They have also stressed tolerance for a modest overshoot of their 2 per cent inflation target, after touching the goal for the first time in
six years.
A big question for policy-makers is whether tax cuts and federal spending increases will overheat the economy, fanning inflation
or asset prices, which already look lofty in some sectors
Balanced against those concerns are the benefits of very low unemployment, which is drawing more people into the labor force and giving
workers a raise after years of stagnant wages
Powell has made plain that they’ll be guided by the data.
EUROPEAN CENTRAL BANKThe ECB is watching to see if the euro-area economy can
bounce back from recent weakness
That’s all the more important now that the institution has decided to retire its bond-buying program at the end of this yea
Escalating trade tensions with the US are topping concerns.
With inflation still short of its goal, those developments will determine how
soon the ECB can raise interest rates
Officials say borrowing costs will stay at record lows at least through the summer of next year, and President Mario Draghi -- who steps
down in October 2019 -- has promised to be “patient.” One area to watch is whether policy makers relax the rules on reinvesting their
maturing debt holdings to give them more firepower.
BANK OF JAPANThe BOJ is forging on with massive monetary stimulus while its peers chart
a course for policy normalization
There’s little prospect of any change soon, given inflation has stalled and remains less than half way to the BOJ’s 2 per cent
target.
Most economists expect Governor Haruhiko Kuroda to keep his current yield-curve settings in place for the foreseeable future, with
the short-term rate locked at -0.1 per cent and the 10-year bond yield target at 0 per cent
If there is any tweaking, it will most likely be with the 10-year yield
While the BOJ has held onto a guideline of buying around 80 trillion yen of Japanese government bonds a year, the actual level of purchases
has dropped well below this since Kuroda’s focus switched to yield management in late 2016, making his policies more sustainable.
BANK OF
ENGLANDThe BOE is managing a puzzling economy that’s growing more slowly than its peers, combined with record-low unemployment and meager
It’ll be tricky, but Governor Mark Carney and his colleagues reckon a few interest-rate increases will be needed over the next three years
Hanging over the outlook is Brexit
A disorderly departure from the European Union could quickly put the BOE back in crisisfighting mode
The biggest issue now is just the uncertainty about the final outcome as the government continues to negotiate both with itself and Brussels
Carney, who steps down next year, says the central bank will be ready for whatever comes.
PEOPLE’S BANK OF CHINAThe People’s Bank of
China is leaning toward an easing bias with more cuts of reserve-requirement ratios in the pipeline this year
The policy tweaks come amid a slowing domestic economy that’s complicated by rising trade tensions with the US Still, policy makers
won’t have too much leeway for adjustments as they’d also need to contain debt growth.
That dilemma has prompted the PBOC to tighten
with one hand and loosen with the other
It has pledged to use monetary policy tools comprehensively and increase funding supply to smaller firms to support growth and fend off
Yet it also refrained from raising borrowing costs in open market operations in June even as the Fed tightens
Even so, with cross-border capital management policies in place, capital repatriation and strong currency weakening aren’t likely to be a
big concern.
RESERVE BANK OF INDIAIndia’s central bank just raised rates for the first time since 2014 and minutes of the meeting show
that all members of the rate-setting panel believe the nation’s economic recovery is strong enough to boost inflation
The threat of costlier oil fanning consumer prices and, with the output gap closing, inflation risks are rising.
That lends support to calls
the RBI will gradually tighten monetary policy in coming months
The swap markets are pricing in at least two more hikes in the current cycle
Still, some economists see this as a one-and-done increase and expect the central bank to adopt a long pause.
CENTRAL BANK OF
TURKEYTurkey’s consumer inflation is seen accelerating in the second half of this year to as much as three times the official target of 5
percent, putting more pressure on the central bank to act
The biggest challenge facing the bank will be to overcome Recep Tayyip Erdogan’s distaste for higher interest rates which the freshly
reelected president thinks are boosting price gains -- contrary to what most economists believe
Nonfinancial companies’ heavy debt burden leaves them vulnerable to sharp spikes in the lira which lost nearly two-thirds of its value in
the last five years as the central bank has failed to act quickly at times of stress.
