Last week Mexico and Jordan’s central banks cut their policy rates while five other banks - Canada, Sweden, Norway, Colombia and Namibia - struck more dovish tones, underscoring that the era of extraordinary accommodative monetary policy is set to continue into next year.
Slower-than-expected global growth, which led the U.S. Federal Reserve to delay its expected tapering of asset purchases, has now forced the Bank of Canada and Norges Bank to drop their tightening biases, while an unflappable Swedish Riksbank maintained its tightening bias but nevertheless cut its growth forecasts.
The Federal Reserve’s surprise decision last month to continue its $85 billion monthly purchases immediately eased the pressure on emerging market currencies by restoring capital inflows, a shift that allowed the Bank of Jordan to cut its rates for the second time this year.
The Bank of Mexico, which has also seen its peso rebound after falling in May along with other major emerging market currencies, cut its rate for the third time this year on growing downside risks to global growth and flagged that it would be trimming its growth forecast.
The Central Bank of the Republic of Turkey also benefited from the prospect of continued ultra easy monetary policy in advanced economies, leaving its rates on hold as the recent rise in its lira currency is helping keep inflation under control.
Although the Central Bank of Colombia maintained its rates last week following three cuts earlier this year, it noted that the downside risks were “not negligible and may have increased recently."
Other central banks that maintained rates last week include the Central Bank of the Philippines and the Central Bank of the Republic of Uzbekistan.
But while most of the world’s central banks are still leaning toward further easing, there is a growing recognition of the dangers to financial stability from continued low policy rates, whether the dangers stem from high property prices - as evidenced by a warning from Germany's Bundesbank last week and observed in a raft of countries such as New Zealand, China, Sweden, Canada, Norway and London - or from investors throwing caution to the wind by taking on excessive risk.
And during the U.S. flirtation with an unprecedented default the previous week, one of the scary prospects was the realization that the Fed and other major advanced central banks with ultra-easy policy have limited ammunition to counter the global financial chaos that would arise from such a default.
There is thus is a growing bias within central banks towards normalizing policy rates so it’s far from a foregone conclusion that global interest rates will continue to decline for much longer.
In addition, there were fresh signs of economic improvement last week.
In the United Kingdom, the Bank of England is expected to signal in next month's inflation report that interest rates may rise sooner than currently forecast as the economy is accelerating, data from China topped expectations and investors are increasingly confident about the euro zone’s slow, but steady climb back from recession.
Last week’s two rate cuts reinforced this year’s trend toward lower rates with policy rates through the first 43 weeks of this year now cut 96 times, or 23.3 percent of this year's 412 policy decisions taken by the 90 central banks followed by Central Bank News.
This is up from 94 total rate cuts after the previous week, but slightly down in percentage terms from 23.4 percent, and down from 25.3 percent after the first six months of the year.
Meanwhile, the trend toward higher rates seen in September has weakened with the number of rate increases worldwide stagnating in the last three weeks at 22. In percentage terms, rate rises declined in to 5.3 percent last week from this year’s 412 policy decisions, down from 5.5 percent the previous week but still up from 4.7 percent at the end of the first half.
LAST WEEK’S (WEEK 43) MONETARY POLICY DECISIONS:
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This week (week 44) nine central banks are scheduled to hold policy meetings, including Israel, Angola, India, Hungary, United States, Fiji, Egypt, New Zealand and Zambia. Zambia has announced it will hold its meeting at the end of the month but not the specific day.
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