Central bank actions worldwide point to 'synchronised' stimulus withdrawal

From India to Europe, recent actions of central banks should not be viewed with the "same lens" but the overall message points to "synchronised" withdrawal of stimulus measures, feel experts.

At least five central banks, across the emerging and the developed markets, have announced their monetary policies over the last two weeks, amid uneven global economic recovery trends.

While the Reserve Bank of India (RBI) and the Bank of England (BoE) hiked the interest rates, three others -- the US Federal Reserve, the Bank of Japan (BoJ) and the European Central Bank (ECB) -- decided to maintain status quo. However, the US Federal Reserve and the ECB have already sent out signals of possible tightening monetary policy approach in due course.

"The actions by global central banks point to a synchronised withdrawal of stimulus measures which they embarked upon post the global financial crisis a decade back," Manish Wadhawan, Head of Fixed Income (Global Markets) at banking major HSBC India told PTI.

Radhika Rao, India Economist at DBS Bank, said that in the ongoing rate cycle, emerging markets and developed markets should not be viewed with the same lens.

While developed markets are normalising their reactions to their domestic developments, emerging markets have adopted a defensive strategy to maintain/ widen rate differentials and draw back capital flows, whilst stabilising their currencies, she observed.

In the past one year, many central banks across emerging markets have tightened their policy stance, including India, Malaysia, Indonesia, Turkey and Brazil, as their currencies have come under pressure.

For the second time in two months, the RBI, on August 1, interest rate by 0.25 per cent to 6.50 per cent on inflationary concerns.

Regarding India, Rao said that "in addition to external push-factors, domestic inflation as well as core inflation are also well-past targets, providing it with ample reasons to tighten policy".

The US Fed has led by increasing the fed funds rate from zero to 1.75 per cent in the past year and a half. It is now being followed by central banks across developed and emerging markets and the recent actions by the BoJ, the BoE and the ECB validate the same, Wadhawan said.

"Clearly, the US Federal Reserve is way ahead of the rest in normalising its monetary policy. The others are a good distance behind - The European Central Bank has provided strong guidance that rate hikes were not under consideration at least until next summer," Rao said.

According to Rao, with Japan's inflation not near the BoJ target, they are unlikely to harbour any intentions to normalise rates. Their recent policy action, instead, was to tweak targets to allow for more volatility and flexibility, whilst maintaining their overall accommodative bias, she added.

On July 26, the ECB left its key interest rate unchanged at 0 per cent while on August 2, the BoE hike the rate by 0.25 per cent to 0.75 per cent. The BoJ and the US Fed decided to keep their rates unchanged on July 31 and August 1, respectively.


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