With one eye on the evo­lu­tion of mon­e­tary pol­icy

Financial Mirror (Cyprus) - - FRONT PAGE -

In my 20 years in the fi­nan­cial world, I have wit­nessed rad­i­cal changes gen­er­ated by a se­ries of events that shook the world. I be­gan my ca­reer in Rus­sia just a cou­ple of years af­ter the col­lapse of the Soviet Union, and de­vel­oped with it dur­ing its re­cov­ery.

With the global econ­omy still striv­ing to re­cover from the eco­nomic cri­sis, each cen­tral bank has dif­fer­ent is­sues to ad­dress and find so­lu­tions that will lead to growth. The world is still plagued by high public and pri­vate debt, re­mark­ably in­creased un­em­ploy­ment rates (with tech­no­log­i­cal ad­vance­ments re­duc­ing the num­ber of avail­able jobs and low­er­ing salaries), limited in­vest­ment, and a slack in real-es­tate mar­kets such as the US.

As a re­sult, cen­tral banks have adopted ‘un­con­ven­tional’ mon­e­tary poli­cies. Sub­se­quent fears that an in­jec­tion on that scale of global liq­uid­ity would lead to hy­per­in­fla­tion, higher gold prices, and the even­tual demise of fiat cur­ren­cies (a cur­rency which de­rives its value from gov­ern­ment reg­u­la­tion or law) have been un­founded. The lat­est and most rel­e­vant ex­am­ple of ‘un­con­ven­tional’ mon­e­tary poli­cies is that en­acted by the Euro­pean Cen­tral Bank, with its quan­ti­ta­tive eas­ing (QE) pro­gramme worth 1.1 trln eu­ros. As part of the pro­gramme, which was an­nounced in Jan­uary, the ECB started buy­ing gov­ern­ment debt on March 9 with the newly cre­ated money.

The QE pro­gramme comes af­ter the harsh aus­ter­ity mea­sures that have been im­ple­mented in the Eu­ro­zone in the wake of the cri­sis. Aus­ter­ity has led to low in­fla­tion - or de­fla­tion – which has pushed up real in­ter­est rates and forced busi­nesses, house­holds and gov­ern­ments to cut spend­ing in or­der to keep their debt from ris­ing. How­ever, mas­sive buy­ing of gov­ern­ment bonds through QE cou­pled with for­ward guid­ance (FG) are pow­er­ful sig­nals of a cen­tral bank’s de­ter­mi­na­tion to bol­ster growth and keep in­fla­tion on tar­get.

Nonethe­less, the EU and other coun­tries’ eas­ing is now be­ing met by ‘tight­en­ing’ mea­sures be­ing im­ple­mented by the US Fed­eral Re­serve, and there is a very real pos­si­bil­ity that such in­com­pat­i­ble poli­cies may trig­ger mar­ket volatil­ity.

Many feel that we are en­ter­ing a new era in mon­e­tary his­tory, as cen­tral banks are tak­ing a more ac­tive – even though un­con­ven­tional – role in deal­ing with the eco­nomic chal­lenges in their ef­fort to be suc­cess­ful in re­duc­ing fi­nan­cial volatil­ity. The fact that for­eign ex­change trad­ing has be­come such a glob­alised ac­tiv­ity means that na­tional cen­tral banks play an even greater role in forex than ever be­fore. Forex traders should be aware of th­ese eco­nomic trends and events to make in­formed de­ci­sions. Dur­ing this time, traders need to be ex­tra care­ful, man­age their risk and to care­fully con­sider en­ter­ing into new trades near the time of such an­nounce­ments.

Per­spec­tives change, needs change. But we need to re­mind our­selves that those changes need not be taken in a neg­a­tive way. We need to lever­age them. Be­ing un­con­ven­tional will even­tu­ally be­come con­ven­tional. Evo­lu­tion comes nat­u­rally – one way or an­other – but it can be within our con­trol.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.