Rates head for more cuts

Central banks across the world are expected to further relax monetary policy as economic growth remains weak and inflation slows

PUBLISHED : Saturday, 11 May, 2013, 12:00am
UPDATED : Saturday, 11 May, 2013, 4:13am

Global central bankers are poised to ease monetary policy even further after a wave of interest-rate cuts from India to Poland.

As Group of Seven finance chiefs gathered in Britain yesterday, economists at Morgan Stanley and Credit Suisse are among those predicting policymakers will keep deploying stimulus amid weak global growth, slowing inflation and the need to thwart currency gains.

"Most central banks in our coverage universe still have a bias to ease," Morgan Stanley economists led by London-based Joachim Fels said in a report. "Given this disposition, it doesn't take much in terms of downside surprises in growth or inflation to tip the balance for more central banks to pull the trigger for more easing."

South Korea's rate cut on Thursday was the 511th reduction worldwide since June 2007, according to Bank of America's tally, done before Vietnam and Sri Lanka yesterday said they were lowering their policy rates.

While the liquidity has sent stock markets surging, it has yet to prove as effective in generating economic growth.

"Central banks are our best friends not because they like markets, but because they can only get to their macro objectives by going through the markets," said Mohamed El-Erian, the chief executive of Pacific Investment Management. "The hope is that improving fundamentals will validate what central banks have done."

Equities are rallying amid the easy monetary policy. The US Standard & Poor's 500 Index set a record level this week and the Dow Jones Industrial Average last week breached the 15,000-point level for the first time. In Europe, stocks have also risen and even the yields on the 10-year notes of crisis-torn Greece have slipped below 10 per cent.

The G7 meeting was "an opportunity to consider what more monetary activism can do to support the recovery, while ensuring medium-term inflation expectations remain anchored", British Chancellor of the Exchequer George Osborne said yesterday.

The Bank of Korea lowered its benchmark to 2.5 per cent from 2.75 per cent. That surprise shift followed an unexpected reduction from Poland's central bank to a record low of 3 per cent. Sri Lanka yesterday took its two main rates down by half a percentage point, surprising economists, while the Vietnamese central bank's refinance and discount rates will drop 1 percentage point each on Monday.

The Reserve Bank of Australia cut to a record 2.75 per cent this week, while the European Central Bank and Reserve Bank of India acted to ease last week. Although the Bank of Japan and the US Federal Reserve refrained from changing policy at their last meetings, the Bank of Japan doubled its monthly bond purchases last month and Fed policymakers last week raised the prospect of increasing the pace of bond buying above US$85 billion a month.

The Bank of England likewise refrained from adding to stimulus on Thursday, keeping its target for asset purchases at £375 billion (HK$4.52 trillion) and its interest rate at 0.5 per cent.

A Citigroup gauge shows economic data in major economies began coming in below forecasts in the middle of March and the index is now near its weakest since August last year.

With commodity costs in decline, the lacklustre growth is also weakening inflationary pressures, forcing central banks to protect against further disinflation. JP Morgan Chase economists predict global inflation will fall to 2.3 per cent in the current quarter, from more than 3 per cent at the start of last year.

As Japan's monetary easing drives down the yen, nations including Australia, New Zealand and Switzerland are also moving to counter climbing currencies before they hurt their exporters. Sweden's Finance Minister Anders Borg said on Tuesday the central bank should consider the strengthening krona.

"Taken together, global factors seem to have become more relevant for central banks," the Morgan Stanley economists said. "There is likely more to come from various central banks."

Fels' team said the ECB might move anew after president Mario Draghi said "we are ready to act again" if necessary and that the Bank of England might try to ease more once Mark Carney became governor in July.

Elsewhere, Morgan Stanley sees added rate cuts in Australia, Poland, Turkey, Israel, Russia and maybe Hungary.

In Asia, Credit Suisse economist Robert Prior-Wandesforde said India and Taiwan might deliver more easing and that the Philippines might reduce the rate for special deposit accounts.

There is also a likelihood China could cut borrowing costs soon, according to Australia & New Zealand Banking.

Less sure is Paul Donovan, a global economist at UBS, who said major central banks either had no need to act again - as in the case of the Fed - or would stand pat because they were having little effect - as with the ECB.

The ECB will refrain from cutting rates until at least 2015, according to the median forecast in an economist survey.

"We're probably not static exactly, but the momentum for further easing is inevitably slowing," Donovan said.

Some central bankers are also signalling irritation with having to drive the recovery effort unassisted. Philadelphia Fed president Charles Plosser said it was "disturbing" to him that "more and more is being expected of central banks".

Even with such exuberance for economic stimulus, central banks might still fail to rally the global economy beyond a growth rate of 3 per cent, below the average of as much as 4 per cent in the years before the financial crisis, said Andrew Kenningham, an economist at Capital Economics.