By Balazs Koranyi FRANKFURT, Feb 4 : The world’s central banks have all but given up hopes they can return to conventional monetary policy soon, openly touting more easing and venturing deeper into the untested waters of unconventional policies.
With global economic headwinds rising, this time from emerging markets, the world’s biggest central banks have all hit a strongly dovish tone in the past day. They pointed to risks from emerging markets, China’s economic slowdown and ultra-low inflation emanating from low oil prices.
That suggests global interest rates are likely to go even lower. And it raises the risk they will set off a vicious cycle of competitive currency devaluations and fuel growing doubts they can meet their mandates.
That is a marked contrast to the start of the year. The U.S. Federal Reserve and the Bank of England both expected to raise rates then, and the European Central Bank said it hoped it was done easing.
In marked contrast, New York Fed Governor William Dudley, among the most influential policymakers on the Federal Open Market Committee, on Wednesday poured cold water on any lingering hopes for a rate hike this year.
“One thing I think we can say with more confidence is that financial conditions are considerably tighter than they were at the time of the December meeting,” when the Fed raised rates for the first time in almost a dcade, Dudley said.
“So if those financial conditions were to remain in place by the time we get to the March meeting, we would have to take that into consideration in terms of that monetary policy decision,” he added.
The Fed’s well-telegraphed rate increase in March suggested to markets that three or four hikes could come this year. But those expectations have faded since the start of the year. Now markets only see a 40 percent chance of an increase hike in next February.
The Bank of England, which meets on Thursday, is also seen sending strong signals that it was not in a hurry to raise rates.
Bank of Japan Governor Haruhiko Kuroda added fuel to the fire overnight when he said he would not hesitate to ease policy further to hit a 2 percent inflation target at the “earliest” date possible. The BoJ surprised markets with a rate cut last week that took Japanese rates into negative territory.
His comments, among others, strengthened the euro, putting pressure on the ECB, which relies to a great extent on the weak currency to generate much-needed inflation.
Conscious that his comment could be seen as battle call in a currency war, Kuroda asked other central banks for their understanding.
“As with the Federal Reserve, the European Central Bank or any other major central bank, the BOJ doesn’t target exchange rates in guiding monetary policy,” Kuroda told parliament.
“By pushing down interest rates and the yield curve, we hope to push down real interest rates so that we can stimulate consumption and investment,” he said on Thursday.
But pushing down currencies has been a key aim for several big central banks and another big devaluation in China is a persistent fear.
“The biggest risk for the world economy at this point is an aggressive policy of devaluation in China,” the head of a major central bank in Europe told Reuters recently. “With uncertainty and volatility already high, it would have a big consequence for all economies.” The People’s Bank of China has been fighting to keep the yuan stable since Jan. 6, when its second sharp depreciation in six months sparked fears of more devaluation as growth slows in the world’s second-biggest economy, already at a 25-year low.
Chinese stocks have lost over a fifth of their value since the start of the year, and a renewed slide in oil prices, a major indicator of economic activity, took Brent crude to its lowest since 2003. The CBOE Volatility Index, the U.S. equity market’s “fear gauge”, has risen sharply.
Mario Draghi, the European Central Bank’s president, also weighed in, arguing that acting too late to combat low inflation was more risky than acting too quickly. His remarks suggested the ECB could cut rates deeper into negative territory as early as March.
“Adopting a wait-and-see attitude and extending the policy horizon brings with it risks: namely a lasting de-anchoring of expectations leading to persistently weaker inflation,” Draghi said on Thursday.
“And if that were to happen, we would need a much more accommodative monetary policy to reverse it,” he said. “Seen from that perspective, the risks of acting too late outweigh the risks of acting too early.” Indeed, markets already expect the ECB to cut its deposit rate to -0.4 percent from -0.3 percent in early March, and they see high chance it will tweak its 1.5 trillion-euro asset purchase programme.