What the BoJ, ECB and Major Central Banks Do to Rest of the World


10 August 2016, 05:41


 Talking Points:

  • The world's largest central banks are near, at or even below the zero threshold on their benchmark rates
  • Policy groups for the world's major, developing (emerging market) economies are comparably in disarray
  • Extremes in monetary policy is promoting more instability than growth, and smaller economies bear the brunt of it

The world's largest central banks are hosting unprecedented accommodative monetary policy programs - though the aim and success of their efforts are coming under greater scrutiny. With rates near or below zero and quantitative easing programs a common effort, collective policy is pushing extremes with a tangible decline in effectiveness and rise in associated risk. The Bank of Japan (BOJ) and European Central Banks (ECB) have stood as the most recent milestones of this diminishing influence. There has been little of the inflation or growth these groups target with the most recent rounds of QE and rates cuts, while their respective currencies have actually appreciated. In the meantime, economic trade partners and financial peers continue to absorb the detrimental side effects.

Looking at the major central banks' benchmark rates, there has been a universal slide in rates that reflects an effort to initially fight the crushing effects of the Great Financial Crisis. Through 2013, the fundamental and financial evidence for successively larger efforts was on offer. Yet, in the past three years, the unintended side effects started to outweigh the targeted virtuous objectives. Throughout, the period however, Emerging Market and smaller trade-oriented countries had to scramble to balance the international force with their own economic issues. In contrast to the uniform drop in developed world rates, emerging market rates have diverged dramatically between inflation issues, economic struggle a need to curb volatile foreign capital flows.

Beyond the contrast between two major players (say Fed and ECB), there is a more dramatic contrast between the developed and emerging market central banks. And, in this widening gulf, speculative necessity is pushing deeper and deeper into extreme risk. We will continue to see this troubling spillover effect, and there are two milestones later this week. The South Korean central bank is scheduled to determine its next move in the shadow of the BoJ after their most recent push to extreme easing that is perceived to offer Japan an unfair trade advantage. For the Mexican central bank, an interest in curbing the Peso's slide seems to be evolving out of a steadying of risk trends, but it wasn't long ago (February) where the group hiked rates 50bps and intervened in the FX market. As fears of ineffective and distorting monetary policy start to percolate to mainstream financial headlines, this is the big picture to keep.



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