The View | As central banks turn dovish, how loose will this year’s monetary policy be?

Nicholas Spiro says the Federal Reserve’s more cautious stance towards raising interest rates has set the pace for other central banks. However, while the US economy may be showing signs of slowing, China and Europe are of greater concern

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Federal Reserve chairman Jerome Powell speaks at a press conference following a two-day Federal Open Market Committee policy meeting in Washington on January 30. After steadily raising interest rates in 2018, the Fed has signalled that it would be in no hurry to increase borrowing costs this year. Photo: Reuters

Published: 1:00pm, 11 Feb 2019Updated: 10:24pm, 11 Feb 2019

In the middle of November last year, the yield on one-year Chinese government debt fell below its American counterpart for the first time ever, according to data from Bloomberg, dropping to 2.5 per cent as Beijing’s shift towards more growth-supportive measures gathered pace. The yield gap between the two countries’ 10-year bonds had also narrowed sharply, dropping to just 30 basis points as the divergence between Chinese and American monetary policy gained momentum.

It was not just the Federal Reserve and the People’s Bank of China that were parting ways. A succession of US interest rate increases, coupled with expectations of further tightening this year as America’s economy powered ahead, contrasted starkly with a slowdown in growth in the euro zone. By early November, the spread between US and German 10-year bond yields had increased to nearly 2.8 percentage points, its widest level in almost three decades.

Divergences in monetary policy were also becoming more pronounced across emerging markets. While some economies, such as Brazil and Colombia, reduced borrowing costs to help stimulate growth, others, notably Indonesia and the Czech Republic, joined the Fed in raising rates with the aim of maintaining financial stability.

Yet, since the beginning of this year, a synchronised global slowdown, driven by a sharp deceleration in China and Europe, has taken root. The publication last Tuesday of survey data on global manufacturing and service-sector output, compiled by IHS Markit, showed that growth slowed to its weakest level last month since September 2016. This has brought about a shift towards looser – or at least less tight – policy stances in both advanced and developing economies.

An employee uses a robotic arm while working on a Siemens angiography system on the assembly line at the Siemens AG Healthineers factory in Forchheim, Germany, in July 2017. A survey of global manufacturing and services output showed that growth slowed to its weakest level in January since September 2016. Photo: Bloomberg

The dovish tilt is being led by the Fed. In a dramatic change to its outlook in December when it raised rates and signalled further hikes this year, the Fed announced at its meeting last month that it would be patient before making any future adjustment. It even hinted that the next move could be a rate cut if America’s economy – which remains buoyant – succumbs to the global slowdown.

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.css-1m2rp1p{color:#34b8b5;}The View | As central banks turn dovish, how loose will this year’s monetary policy be?

The View | As central banks turn dovish, how loose will this year’s monetary policy be?