Chief economist update: Global easing

In his outing before the Australian House of Representatives Standing Committee on Economics on August 9, Reserve Bank of Australia (RBA) governor Philip Lowe practically gave his nod of approval in Financial Standard's clear as the crystal ball's prediction (made two days prior) that the RBA is heading to zero.

Read governor Lowe's lips: "Globally, if all central banks go to zero, then we'd have to consider that as well."

... and more, if necessary: "We are prepared to do unconventional things if the circumstances warranted it".  Negative interest rates? Quantitative easing? You name it! But these policy prescriptions/actions aren't "unconventional" anymore ... they have become the convention since the 'Great Recession'.

Just when we thought, things were heading for normality, the US Federal Reserve made an about-face in July, discarding its trek towards policy normalisation and cut the fed funds rate by 25 basis points to 2.25% in what's speculated of a rate-cutting regime.

The Bank of Japan (BOJ) persists with its quantitative and qualitative monetary easing (QQE) first, with negative interest rates, and later expanded to "with yield curve control". The BOJ's target rate had been negative 0.1% since January 2016 and in September of the same year, the BOJ announced: "The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain more or less at the current level (around zero percent)".

Safe-haven yen purchases, resulting from current global economic and market uncertainties indicate that Tokyo would have to do much more stimulation. Whatever happened to Abe's three arrows?

The European Central Bank's (ECB) main refinancing rate had been at zero since March 2016 and while it had ended QE in December last year, it's launching TLTRO III (targeted longer-term refinancing operations) in September this year.

But this was before the advent of fears over a German recession and the latest political uncertainty in Italy where the ruling party faces a no-confidence vote.

The Bank of England (BOE) despite earlier alluding to higher interest rates, has kept the Bank Rate on ice since it lifted it by 25 bps to 0.75% this time last year while at the same time maintaining "the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion". The BOE is now expected to cut interest rates instead as political uncertainty compounds the increasing prospect of a no-deal Brexit.

To complete the global easing, the Reserve Bank of New Zealand's (RBNZ) bigger than expected 50 bps rate cut to a record low of 1% at its August meeting - that came at about the same time as similarly surprising cuts from the Reserve Bank of India and the Bank of Thailand - while at the same time not discounting negative interest rates and/or quantitative easing.

While most are still speculating over the "prospect" of a currency war, in my books it's well and truly underway with many central banks now lowering their target interest rates to cheapen their respective currencies, led by Trump who wants the Fed to cut interest rates by a lot more to lower the US dollar exchange rate.

And even before this, Reuters reported on August 6 that: "Interest rate moves by central banks across a group of 37 developing economies showed a net eight rate cuts last month [July] - the largest number since March 2015. Some unexpected entrants such as South Korea and Serbia joined the list. In June, developing market central banks recorded a net five rate cuts."

The Australian dollar's depreciation - down by 4% versus the US dollar this year to date and down by 2.6% on the trade weighted index (TWI) - offers the Australian economy a fighting chance.

Then again, the RBA would have to fight rate cuts with rate cuts if it is to preserve the Australian dollar's competitiveness and mitigate the headwinds from a slowing global economy ... even if it means taking the official cash rate to zero.

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