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Economy

Global Monetary Easing Cycle Starts Taking Shape

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Central banks have been challenged to respond to the underwhelming data and rising trade tensions that have started to impose a drag on the global economy and weigh on investment and trade flows. Recent stock market volatility has been as much about the deteriorating global fundamentals as market doubts about the ability of central banks to counter this negative turn.

 

The global central bank community has responded with a "do whatever it takes" type statements

  • US Federal Reserve (Fed) – It has highlighted its readiness to cut rates sharply and end balance sheet reduction.
  • European Central Bank (ECB) – It has highlighted a combination of rate cuts and a possible resumption of asset purchases as its most effective tools.
  • Bank of Japan (BoJ) – which is already engaged in asset purchases, a further lowering of rates across the yield curve appears to be the answer.
  • People’s Bank of China (PBoC) – It has signaled lowering reserve requirements and its short term cash target and introducing other liquidity tools.

 

 

Pre-emptive policy easing should be welcomed by the market, as it improves growth outlook and thus supports valuations and helps stabilize risk sentiment. Citi analysts believe that a dovish Fed and in turn a weaker USD, if materialized, would be positive for EM assets.

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