Central banks want world to party on as punch bowl removed

Central bankers are gingerly trying to take away the punch bowl without interrupting the party. Led by interest-rate increases by the Federal Reserve and the People’s Bank of China, central banks around the world shifted towards a tighter monetary stance this week. Yet the moves were either so well-telegraphed, or so tiny, and the language about future action so hedged, that there was barely a ripple in financial markets.

“They’re terrified of upsetting the markets,” said Paul Mortimer-Lee, chief market economist at BNP Paribas. So “they’re all exiting quite slowly from emergency settings” on monetary policy.

The likely result of this leisurely approach: another year of synchronised global growth in 2018. Indeed, both the Fed and the European Central Bank revised up their forecasts for the growth of their respective economies next year even as they signaled that they would be slowly scaling back the stimulus they are providing.

“The global economy is doing well,” Fed Chair Janet Yellen told reporters on Wednesday after the US central bank raised interest rates for the third time this year. “We’re in a synchronised expansion. This is the first time in many years that we’ve seen this.”

While the Fed’s rise had been widely anticipated by investors, Thursday’s move by the PBOC was a surprise. Yet the move was so small — only five basis points — that the markets took it in stride. “The central bank does not want to jeopardise the market with an aggressive hike,” said Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group Ltd, although the move “does indicate the tightening bias of the policy makers and this stance will continue in 2018.”

Sun Guofeng, director of the PBOC’s financial research institute, said in a recent speech that emerging market economies should also start monetary policy normalisation and exit the easing measures that were put into place to address the global financial crisis.

Mexico’s central bank raised its benchmark interest rate for the first time since June on Thursday, lifting borrowing costs 25 basis points to 7.25 per cent in a split vote that saw one board member favoring a 50 basis-point hike. Turkey’s central bank raised one of its main interest rates by less than expected and vowed to keep policy tight until the inflation outlook improves. The move sent the lira sliding.

In spite of the global upswing, major central banks have moved slowly to reduce stimulus because inflation remains muted and below their targets. While ECB President Mario Draghi said on Thursday that he’s grown more confident that inflation will eventually rise to the central bank’s goal, the ECB’s own staff forecast doesn’t even see that happening by 2020.

The euro-area’s monetary authority, which has an inflation target of just under 2 per cent, on Thursday reaffirmed its plan to halve its asset purchases to €30 billion ($35 billion) a month starting in January and continue for at least nine months until the end of September.

The Bank of Japan is one notable outlier, with officials keen to avoid any inkling of a move away from their unprecedented stimulus. While a new dissenter on the board calling for more stimulus has prompted the BoJ to adjust its communications to flag risks of additional easing, it’s wrong to interpret such comments as a signal of an earlier policy exit, according to people familiar with the central bank’s discussions.

A different story unfolded at Russia’s central bank, which unexpectedly accelerated its pace of monetary easing on Friday with a 50 basis-point rate cut. It said oil-production curbs have reduced inflationary risks.

Central bankers around the world are also wary of getting too far ahead of their counterparts in tightening policy out of fear that could boomerang on them by spurring a steep rise in their currencies — a rise that would dampen both economic growth and inflation.

Norway’s central bank got a taste of that on Thursday, as the krone climbed more than one per cent against the euro after policy makers signaled they may start raising interest rates earlier than indicated in the past. Mindful of the potential fallout in the foreign exchange market, Swiss National Bank President Thomas Jordan said on Thursday his institution was in “no rush at all” to normalise policy even as it forecast that inflation will breach its 2 per cent target in 2020. — Bloomberg

The global economy is doing well... We’re in a synchronised expansion. This is the first time in many years that we’ve seen this Janet Yellen, Fed Chair