Chief economist update: Race to the bottom redux

It's a hat trick! Three central bank meetings, all three cut interest rates, all three policy decisions a surprise.

The Reserve Bank of New Zealand (RBNZ) cut the official cash rate by 50 bps to a new record low of 1% at its August meeting. This is bigger than market expectations for a 25 bps reduction and followed May's 25 bps rate cut.

The Bank of Thailand (BOT) snipped 25 bps off its key policy interest rate to 1.50%, surprising financial markets which expected it to keep rates unchanged. This was the central bank's first interest rate cut since April 2015.

The Reserve Bank of India (RBI) reduced its repo rate by 35 bps to 5.4%, greater than market expectations for a 25 bps cut and the fourth cut this year.

The wordings may be different, but all three (more or less) gave similar rationales for their policy decisions - trade tensions, global slowdown, relative currency appreciation - all putting downward pressure on their domestic economic growth and inflation.

"The members discussed the recent slower domestic GDP growth and the impact of slowing global demand on New Zealand through the trade, financial and confidence channels. The members noted that heightened global uncertainty was reducing investment and suppressing trading partner growth. This highlighted the risk of a larger or more prolonged slowdown in global economic growth," RBNZ said.

Meanwhile, the BOT said: "The Committee expressed concerns over the baht appreciation against trading partner currencies, which might affect the economy to a larger degree amid intensifying trade tensions."

The RBI? "Domestic economic activity continues to be weak, with the global slowdown and escalating trade tensions posing downside risks."

If the US Federal Reserve cut the Fed funds rate again - by 25 bps to 1.75%-2% - as expected (or as Trump wants), other central banks may need to do more chopping.

Given the low level of interest rates in most economies, and with inflation still positive, real interest rates are close to or already negative. This means that central banks are again virtually giving money away to anyone who wants to borrow.

Businesses would not want to borrow money because demand for their goods and services are weakening due to the global growth slowdown resulting from the on-going US-China trade war.

While current labour market stats indicate continued strong employment growth, consumers would not want to borrow for fear of losing their jobs amid the current uncertain global environment, in turn, contributing and compounding the slowdown.

The race to the bottom is back on.

Read more: BOTBank of ThailandReserve Bank of IndiaReserve Bank of New ZealandFederal Reserve
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