Global economy looking up, policy continuity is key

There’s much to cheer about the state of global economy as of today. Favourable data from four significant regional players — the US, Europe, China and Japan — shows the global economy is gathering strength and growing at a synchronised pace. There’s renewed confidence, and hence more predictability in terms of policy initiatives. For instance, the US Federal Reserve raised the interest rates during its meeting last week for the third time this year and signalled further tightening. The European Central Bank confirmed plans to scale back asset purchases from January, and the Bank of England has indicated raising interest rates in coming months. In times of crisis, markets usually hang on to every word of the central bankers and react. But this time around these three major announcements last week did not disrupt the financial markets, which shows the continued orderly acceptance of higher policy rates. In no uncertain terms, it is worth celebrating. Major economies of the world have been in a low interest rate era for almost a decade. Central bankers argue that it was necessary to encourage investment after the financial crisis plunged the world into recession. They were correct, too. But now it is about time to hike rates to avoid build up of asset bubbles.

The pace and the extent of tightening, however, needs to be closely watched. Jobs and economic growth have picked up pace but inflationary pressures have remained absent significantly in the West, despite several initiatives. Central bankers have a fine balance to maintain to ensure that withdrawing of stimulus doesn’t affect growth, or leads to renewed debt problems. There are concerns that aggressive policies could trigger fall in asset prices, too, which should be avoided. As some semblance of normality is being restored in global markets, central banks have to pay more heed to avoid boom-bust credit cycles. The global economy is moving in the positive direction and building a more solid foundation for 2018, but challenges remain. And central bankers need to ensure continuity.