El-Erian says coun­tries weak­en­ing cur­ren­cies in fight for global growth

The Pak Banker - - COMPANIES/BOSS -

Mo­hamed El-Erian, the chief eco­nomic ad­vi­sor at Al­lianz, said on Fri­day the Bank of Ja­pan's shock­ing move to take one of its main in­ter­est rates into neg­a­tive ter­ri­tory un­der­scored the coun­try's hope to weaken the yen to re-in­flate its econ­omy. "Coun­tries are pur­su­ing their do­mes­tic ob­jec­tives al­most re­gard­less of the in­ter­na­tional con­se­quences," El-Erian said in an in­ter­view at Reuters' New York of­fices. "You see this most clearly on the cur­rency front, where with the ex­cep­tion of the United States, the vast ma­jor­ity of coun­tries hopes to weaken their cur­ren­cies. I would put the Bank of Ja­pan ac­tion in that cat­e­gory."

While many in­vestors had an­tic­i­pated an ex­pan­sion of the BOJ's as­set-pur­chase pro­gram this year, few ex­pected Ja­pan to join the Euro­pean Cen­tral Bank and the cen­tral banks of Swe­den, Den­mark and Switzer­land in neg­a­tive ter­ri­tory on Fri­day. ElErian said the BOJ's move her­alds a new re­al­ity of diver­gent cen­tral bank poli­cies and a lack of global pol­icy co­or­di­na­tion.

"We are go­ing to see the Fed­eral Re­serve con­tinue to try to very care­fully ease its foot off the ac­cel­er­a­tor while the other three sys­tem­i­cally im­por­tant cen­tral banks - the ECB, BOJ, Peo­ple's Bank of China - are go­ing to be press­ing harder on the stim­u­lus ac­cel­er­a­tor," he said. The yen fell sharply against the dol­lar af­ter the BoJ set the coun­try's first-ever neg­a­tive in­ter­est rate and sig­naled that fur­ther cuts were pos­si­ble.

El-Erian said if the dol­lar strength­ens an­other 5-10 per­cent, "the Fed will start wor­ry­ing." In­deed, the Fed kept in­ter­est rates un­changed Wed­nes­day and said it was "closely mon­i­tor­ing" global eco­nomic and fi­nan­cial de­vel­op­ments.

El-Erian said "coun­tries are fight­ing for a small amount of global growth as op­posed to pur­su­ing poli­cies that cre­ate the in­cre­men­tal growth that the sys­tem is ca­pa­ble of. That's the big tragedy - the sys­tem is ca­pa­ble of grow­ing much faster but it's be­ing held back." In the wake of slow­ing global eco­nomic growth and mar­ket tur­moil, El-Erian said his base case is for just two rate hikes this year, as op­posed to the four the Fed had been fore­cast­ing, and pos­si­bly even one or none if eco­nomic and fi­nan­cial mar­ket con­di­tions worsen.

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