INSUBCONTINENT EXCLUSIVE:
Authors: JordanBy DK AggarwalMarkets are closely watching the central banks for clues as to how aggressive they will be in the year ahead
Central banks across the globe are preparing the markets for a gradual withdrawal from accommodative monetary policies, which they had
introduced in the system to revive their economies
The Great Recession was highly disruptive for the global economy and its effects are still being felt.
Meanwhile, inflation has started
inching up but is still distant from the desired levels of the central banks, even as growth has started picking up, resulting in an
environment that continued to support the bulls in stock markets.
However, one cannot deny the fact while global growth has returned,
dependence on monetary accommodation has left major structural problems in almost all the major economies
At its recent meeting, Fed’s tone was not quite as hawkish as expected but was optimistic on the outlook that it intends to continue
raising rates at a gradual pace.
Undoubtedly, the growth story is looking strong with business surveys at decade-plus highs
However, US unemployment is extremely low and is still below target
Going forward, the most important economic data that will be relevant to gauge the next Fed move would be employment and inflation.
The
European Central Bank (ECB) is currently looking to exit its €30 billion monthly bond purchase programme
This programme is currently scheduled to last till the end of September 2018
However, the recent fall in inflation is expected to put policy makers in a dilemma about ending the bond-buying programme
The next policy meeting is scheduled to be held on June 14
Also, GDP of euro zone area was down 0.3 percentage points in the three months to March.
The Bank of Japan (BoJ) has repeatedly pushed back
the timeframe for its 2 per cent inflation target, which it had first adopted in 2013 after years of deflation
Recently keeping interest rates unchanged, BoJ removed a phrase on the timeframe for achieving its 2 per cent inflation target due to
subdued inflation.
Japan's economy is expanding moderately, but inflation remains weak
Moreover, it also said that it is no hurry to reach its elusive price goal as the economy is in good shape
BoJ’s massive monetary easing programme is cornerstone of Prime Minister Shinzo Abe's ‘Abenomics’ to spur the growth of the land of
rising sun.
Back home, given the sharp and substantive increase in crude oil prices (Brent crude $75 a barrel), it is already putting
pressure on the Reserve Bank of India for an early tightening move
Though RBI has lowered its inflation forecasts, however, it still continues to sound cautious on various fronts that pose upside risks to
Surging crude oil prices, risks of slippage in fiscal deficit, rupee weakness and rising bond yields have complicated RBI’s policy front
At its recent meeting, RBI kept interest rates unchanged and at the same time cut its inflation forecast, citing lower food prices
The Indian economy, too, is facing the return of the twin deficits
In the days to come, the attention of the market participants will certainly be on when and how quickly the central banks will reduce the
The idea of tighter monetary policy may cause some concern among stock investors
However, on the whole, while US remains firm on monetary withdrawal, ECB and BoJ are still on course to providing monetary accommodation for
longer period which may cushion the immediate impact on equity markets.
Meanwhile, US’s trade negotiations with China are something
central bankers across the globe will be watching closely.