Global easing cycle to gather steam as four central banks slash rates

A string of central banks have cut interest rates, suggesting the global rate-cut cycle will gather steam in the months ahead.

A string of central banks in the Asia-Pacific region this week cut interest rates in a surprisingly aggressive fashion as the fallout from the US-China trade war intensified, suggesting the global rate-cut cycle will gather steam in the months ahead.

The trade war has hit markets hard in Southeast Asia, a fast-growing region deeply intertwined with global supply chains and dependent on trade with both the US and China.

Two of the central banks that reduced rates on Wednesday — India and New Zealand — were among the first to begin easing policy earlier this year and were a precursor to the Federal Reserve’s rate cut in late July, its first since 2008.

Thailand’s central bank also reduced interest rates on Wednesday for the first time this year, reversing a late 2018 increase. The European Central Bank signalled in July that it would consider injecting fresh stimulus when it meets in September.

Yesterday the Philippine central bank cut its benchmark borrowing rate to 4.25 per cent from 4.50 per cent, although this was expected.

With banks in the Asia-Pacific region moving again, the global easing cycle may turn out to be longer and deeper than previously expected. Investors increased their expectations for a rate cut from Australia’s central bank in the wake of New Zealand’s move.

“It’s getting more and more difficult to make the case that central banks can fiddle around the edges on monetary policy,” said Neil Shearing, chief economist at Capital Economics. “There will have to be more substantial easing.”

One reason: with interest rates already ultra-low or even negative in many parts of the world, central banks may need to be aggressive early on to have an effect on financial markets and exchange rates.

“There’s quite limited ammunition left for many central banks; you want to use that very wisely,” said Ben May, an economist at Oxford Economics.

Central banks have a choice: either hold their firepower for emergencies or act early for a bigger effect, he said. The decisions out of the region “suggest central banks are going down that second option”, he said.

With central banks in big, developed countries either lowering rates or poised to do so, emerging-market central banks have greater flexibility to stimulate their economies without having to worry about capital fleeing from their financial markets to chase higher returns elsewhere. Central banks in Malaysia, Indonesia, South Korea and South Africa have also reduced policy rates in recent months.

Meanwhile, inflation is largely under wraps in many developing economies and well below the 2 per cent annual growth rates that central banks in wealthy countries consider optimal. This means policymakers have little to lose by leaning on the forceful side with policy easing.

“There’s not that kind of balancing act that central banks have had to do in the past,” said Mr May, referring to economic stimulus on one side and inflation fears on the other.

Most economists had expected NZ’s central bank to make a one-quarter-percentage-point reduction.

But it was double that size, to 1 per cent from 1.5 per cent. NZ “appears to be adopting the ‘sooner is better’ approach to monetary policy setting”, said analysts at ING Bank.

Thailand’s central bank also surprised investors. The monetary policy committee cut its policy rate to 1.50 per cent from 1.75 per cent. Nine out of 11 economists polled by The Wall Street Journal had expected the central bank to hold steady.

India’s central bank cut its key lending rate to 5.4 per cent from 5.75 per cent, deeper than investors expected and its lowest level in nine years as it tried to kickstart lending in Asia’s third-largest economy.

Policy easing hasn’t only involved interest rates. Switzerland’s central bank appeared to have intervened in foreign exchange markets late last month to weaken the Swiss franc, according to the central bank’s weekly sight deposit figures and monthly foreign exchange reserves figures.

By stepping in — which involves purchasing foreign assets with freshly created Swiss francs — the Swiss can weaken the franc and provide a boost to exporters, effectively easing its monetary stance.

The Swiss National Bank’s foreign reserves climbed by around 8 billion Swiss francs ($12.1bn) to SFr768bn in July, according to the SNB’s monthly report.

But like many other central banks, its scope for action is limited. The SNB’s foreign reserves exceed Switzerland’s entire gross domestic product, raising doubts about how assertive the central bank could be if the franc, a traditional safe haven in times of global stress, were to strengthen significantly more.

The ECB sent a strong signal last month that it was preparing a cut in its deposit rate, currently minus 0.4 per cent, and announce a fresh round of bond purchases as soon as its next meeting on September 12.

Mr Shearing said he expects a 10-basis point reduction in the ECB’s deposit rate next month and a restart in new bond purchases — which ended last December — of €30 billion ($49.6 billion) in December.

But with German industrial production posting what Mr Shearing called a horrific 1.5per cent monthly drop in June, “it’s not going to take much” to move those bond buys forward, he said.