Last week four central banks, including Indonesia's, kept their policy rates steady as Brazil continued its tightening cycle and Tajikistan cut its rate as global financial markets gyrated in sync with the prospect of reaching a solution to the U.S. political gridlock that is threatening the global economy.
Observers believe Washington eventually will find a way to raise the debt ceiling and thus avoid a calamitous default, but the damage to the U.S.’s dominant role in the global financial system may already have happened.
With the global economy for the second time in two years held hostage to U.S. political bickering over the federal debt ceiling and budget, international creditors, including China, are clearly worried with the consequence that the diversification of international reserves away from U.S. dollars is likely to accelerate.
Even Stanley Fischer, former Bank of Israel governor, World Bank chief economist and International Monetary Fund first deputy managing director, seemed taken aback by how partisan politics in Washington are undermining international trust in the U.S.
“This is a remarkable period in that both monetary policy and fiscal policy in the United States are at the center of uncertainty in the world, and about the world economy, and that is an extraordinary situation,” Fischer told Bloomberg television.
“This was usually the country you could rely on,” Fischer added, thereby raising the prospect that the creditworthiness of the U.S. can no longer be taken for granted.
This growing distrust in U.S. political leadership is likely to speed up the momentum toward a more multi-polar world, to paraphrase Christine Lagarde, IMF managing director, who on Friday noted the share of emerging and developing economies of global output will rise to nearly two-thirds from one half in the next decade.
“So the stage is set for a world, 20 or 30 years from now, where economic power will be far less concentrated in the advanced economies—and more vastly dispersed across all regions,” she said.
As if to underscore this coming shift in economic power, the People’s Bank of China and the European Central Bank on Thursday agreed on a bilateral currency swap with a maximum size of 350 billion yuan, or 45 billion euros. This was another step toward the internationalization of the renminbi that will eventually allow it to become an international reserve currency.
And Hong Kong's securities exchange said it would apply a bigger discount to U.S. Treasuries used as collateral, an indication of how swift global financial markets are reacting to the threat of a U.S. default and the pivotal role of Treasuries in global finance.
"Politicians don't quite seem to have grasped how important the Treasury market is to the global financial system," HSBC chief economist Stephen King told Reuters.
Amidst the tumult in Washington politics, President Obama nominated Federal Reserve Deputy Governor Janet Yellen as successor to Ben Bernanke, an comforting decision as it guarantees continuity and an experienced hand in guiding U.S. monetary policy through the risky process of winding down quantitative easing and eventually normalizing policy.
Through the first 41 weeks of this year, the global trend toward lower rates continues to weaken as central banks have now raised rates 22 times, or 5.6 percent of this year’s 395 policy decisions by the 90 central banks followed by Central Bank News, up from 5.4 percent the previous week and from 4.7 percent at then end of June.
Brazil again raised its rate this week, its fifth rate hike in a row, and signaled that it is likely to continue tightening by repeating the same statement that has accompanied the previous rate rises.
Some economists had expected the Central Bank of Brazil to signal that its tightening cycle was coming to an end and viewed the lack of any new statement as a sign of further rate rises.
Emerging markets account for 45 percent of the 22 rate rises worldwide, with Brazil, Indonesia and India accounting for nine of those rate rises.
Tajikistan was the only other central bank to change rates last week, illustrating the absence of global inflationary pressures.
Policy rates have been cut 90 times so far this year, or 22.8 percent of this year’s policy decisions, the same percentage as in the previous week but down from 25.3 percent after the first half of 2013.
Despite the unease hanging over financial markets from politics in Washington and the downward revision in global growth forecasts by the IMF, the message from two central banks last week was surprisingly upbeat.
South Korea, which held its rates steady, said exports were improving and domestic demand was improving while Peru, which also held rates steady, said indicators of the external market had shown a slight recovery.
But embattled Indonesia, which paused after raising rates four times this year, had an opposite view, seeing a slowing global economy that will put pressure on its exports.
The Bank of England also maintained its policy stance last week, but made no comment, as usual.
LAST WEEK’S (WEEK 41) MONETARY POLICY DECISIONS:
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This week (week 42) six central banks are scheduled to hold policy meetings, including those from Russia, Singapore, Sri Lanka, Thailand, Mozambique and Serbia, which pushed back its meeting to Friday from Thursday.
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