Monetary Policy Week In Review – Dec. 8, 2012: Global Economy Asynchronous, Euro Zone The Center Of Vortex
Last week 11 central banks took monetary policy decisions, with four banks (Australia, Uganda, Poland and Azerbaijan) cutting rates, one bank (Malawi) raising rates and the remaining six (Canada, United Kingdom, the European Central Bank, New Zealand, Egypt and Peru) keeping rates on hold.
Year-to-date, the 88 central banks followed by Central Bank News have cut their policy rates 118 times and only raised them 29 times, i.e. rates have been cut more than four times as often as they have been raised, illustrating the easy policy stance worldwide.
Central banks in developed markets have cut rates 15 times so for far this year, including last week’s rate cut by the Reserve Bank of Australia, while rates have been cut 30 times by central banks in emerging markets.
The takeaway from last week’s central banks’ policy statements is that the global economy is stuck in an asynchronous mode with geographical distance still a factor in an age of instant communication, non-stop information and global sourcing.
The euro zone economy remains in a downward spiral that is sucking in nearby countries, such as the United Kingdom and Poland. The prospect for the euro zone economy next year remains bleak and rate cuts by the European Central Bank (ECB) and the National Bank of Poland look likely.
Meanwhile, economies that are further afar from Europe and less directly affected – such as Peru, Canada and New Zealand – are still expanding and looking ahead to improving growth in 2013. The Bank of Canada maintained its tightening bias while the Reserve Bank of New Zealand expects growth to accelerate.
Australia, whose resource-rich economy has been feeding China’s voracious appetite for iron ore, coal copper and other minerals, is now starting to prepare for lower mining investments. Last week’s rate cut last week was an effort to boost non-mining sectors and soften its strong currency.
Quantitative easing was also in focus last week with the Bank of England choosing not to expand its asset purchase program that was completed last month. This was hardly because the UK economy is in great shape but rather because of the limits of quantitative easing as a way to stimulate growth.
Minutes from the BOE’s November meeting show that members of the policy committee still believe that asset purchases fundamentally are an effective policy tool. However, its effectiveness depends on the state of the economy and right now the UK economy is not responding to lower interest rates – the dilemma of the zero bound that has been haunting major economies since 2009.
“At the present time, it was possible that elevated uncertainty and a desire to reduce leverage meant that real activity was less responsive to lower borrowing costs than normal,” the minutes said, adding this situation could suddenly reverse and thus the impact of further asset purchases.
Quantitative easing will also be in focus next week as the Federal Reserve will decide on whether it wants to extend Operation Twist, which expires at the end of December, or replace it with something else or with nothing. Under the program, the Fed extended the maturity of its assets by selling short-term bonds and buying longer-term bonds to push down those yields.
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