New York: The Federal Reserve’s gradual exit plan from printing money has shifted the world’s central bank landscape and thrown financial markets into a spin.
The US central bank has pumped $85bn a month into its economy but has now said it will slow that rate and maybe halt it by mid-2014. The big worry for investors is that there is no playbook for stopping this unprecedented stimulus.
In the coming week, the European Central Bank, Bank of England (featuring Mark Carney’s debut as governor) and the central banks of Australia, Sweden, Poland and Romania all hold monetary policy meetings.
They offer a broad snapshot of the problems facing different countries. The ECB and its UK counterpart have made clear no policy shift is imminent, Australia’s fate is closely tied to China where it exports vast amounts of raw materials, while Poland and Bulgaria are part of the emerging market world that has borne the brunt of recent volatility.
Following is a breakdown of how these central banks, and others, may act as thoughts turn tentatively to quitting years of extraordinary policy measures.
The ECB, unlike the central banks of the US, Japan and Britain, has not created money out of thin air and is expected to leave interest rates at a record low 0.5 percent next week and for the rest of the year.
Perhaps its biggest concerns are the continuing reluctance of banks to lend in the weaker euro zone members and rising borrowing costs in those countries since the Fed upset the applecart. That brought to an end a 10-month trend of cheaper borrowing following the ECB’s pledge to buy government bonds in potentially unlimited amounts to shore up the single currency, although yields remain well short of danger level.
It is not clear what the ECB can do. Bond-buying can only be triggered if a country requests help from the euro zone’s rescue fund and there is no sign of that happening soon. There has been talk of cutting the deposit rate - which banks get for storing their money at the ECB — into negative territory to try and boost lending. But that rate is already at zero and has not prompted banks to help the wider economy.
If deflation loomed, the ECB’s mandate would allow it to print money but again that looks unlikely. Another option would be an offer of cheap, long-term liquidity to banks similar to the more than ¤1 handed over last year but there has been no hint of the ground being prepared for that.
The ECB has emphatically denied a report that it was considering launching a new bond purchase programme under which it would buy debt of all 17 euro zone countries.
Britain’s central bank holds a policy meeting on Thursday at which Canada’s Mark Carney will make his debut as governor.
The bank has already created £375bn of new money to buy government bonds and no more is expected to be sanctioned this time. A Reuters poll of economists gave a median 40 percent chance that more pounds will be printed before the year-end.
There is no indication that it will begin to unwind that policy or raise interest rates in the foreseeable future, with rates expected to remain at a record low until at least 2015.
The Bank of Japan is heading in the opposite direction to the Fed. It stunned financial markets on April 4 by setting in motion an intense burst of monetary stimulus, promising to inject $1.4 trillion into the economy, doubling its bond holdings in two years and boost purchases of risky assets in an attempt to end years of deflation.
Reuters
