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As the Fed’s downsizing looms, global central banks look at their own exits from the stimulus

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As the Fed’s downsizing looms, global central banks look at their own exits from the stimulus

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TOKYO / JOHANNESBURG / LONDON – Haunted by memories of past US interest rate hikes, the world’s central banks are laying the groundwork for a transition to life with less global stimulus, and many countries already they signal movements towards the exit.

While the Federal Reserve has publicly pledged to keep interest rates close to zero, with no hikes until the end of next year at the earliest, official comments on inflationary pressures could become a chorus in the coming months, lo which makes the reduction a more concrete prospect and is likely to increase. volatility in global financial markets.

For some developed economies, a return to pre-pandemic conditions means that the withdrawal of the central bank stimulus is already in the works.

Meanwhile, the most vulnerable central banks are strengthening their financial systems to prevent the kind of capital flight that hit emerging markets during the 2013 “taper tantrum,” which was sparked by mere signs of tightening from the Fed after years of super easy policy implemented during the Global Financial Crisis.

“There is a great divergence between the economies emerging from the pandemic and those that are left behind. Some emerging central banks may be forced to raise rates to defend their currencies, even at the cost of damaging their still fragile economies, ”said Takahide Kiuchi, a former board member of the Bank of Japan (BOJ).

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“This trend can be amplified if the Fed communicates its taper strategy in the coming months. This could be one of the risks to the global economy, ”said Kiuchi, currently an economist at the Nomura Research Institute.

The Fed has said it will not begin to reduce its massive stimulus until there has been “further substantial progress” in the recovery of the US labor market.

While the recovery in employment remains patchwork, stronger-than-expected inflation increases the possibility that the Fed will have to adjust policy earlier than expected.

For now, markets are bracing for the possibility that the Fed will begin communicating its phase-down strategy at its Jackson Hole symposium in August, with possible action later in the year.

Some central banks are already responding.

In April, Canada’s central bank became the first of the Group of Seven countries to withdraw the stimulus from the pandemic era, noting that rates could start to rise in 2022.

The Norwegian central bank has already announced plans to raise rates in the third or fourth quarter of 2021.

New Zealand and South Korea have similarly dropped strong indications that policy tightening is on the agenda as conditions improve.

Although decisions in these countries would be based mainly on internal considerations, the eventual withdrawal of support by the Fed is emerging as a global risk for all central banks.

Even Japan’s central bank, which has barely budged from its ultra-accommodative setup throughout decades of global cycles, may see an opportunity to reduce stimulus.

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“A Fed rate hike can give the BOJ a perfect opportunity to normalize policy, without worrying too much about triggering a spike in the yen,” Nomura’s Kiuchi said.

WOBBLE CLOCK

Developing economies face the greatest risks from the tightening of the Fed, which in the past caused market twists and turns as rising US interest rates pulled funds into dollar assets and away from markets. emerging, as happened in 1998 and 2013.

Asian markets, the epicenter of the 1998 Asian financial crisis, remain in significantly better shape with strong foreign exchange reserves to support any currency collapses.

The governor of India’s central bank said last week that its reserves now exceed $ 600 billion, which he hopes will help against the challenges of “global spills.”

But some analysts warn that the lessons of the Asian financial crisis may not apply to the current pandemic-induced shock.

“This crisis is like no other in the sense that it is not a financial crisis or an economic crisis,” said former BOJ official Nobuyasu Atago, who is now an economist at Japan’s Ichiyoshi Securities.

“The inequality of the current global economy creates several risks for emerging economies.”

Among the nations that view the Fed with suspicion is Indonesia, which relies on foreign inflows to finance its current account deficit.

“Next year we must prepare for the possibilities of the US central bank, the Fed, to change its monetary policy, reducing its liquidity intervention,” Bank of Indonesia Governor Perry Warjiyo said last month, adding that such Changes in US policy would likely affect local bond yields.

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The most vulnerable emerging market central banks, such as Brazil, Ghana and Armenia, have already started their tightening cycle due to mounting inflationary pressures.

Russia’s central bank is expected to raise rates for the third time in a row on Friday with inflation well above its target, according to a Reuters poll.

Turkey was ahead of the pack and aggressively tightened last year, a move the central bank governor hopes will serve as a “shield” against any Fed pivot.

But heavy external debt leaves Turkey vulnerable to talk of a Fed cut. Rising yields in the United States recently helped push the lira to record lows, delaying expected rate cuts.

For now, policy makers in places like Thailand, the Philippines and South Africa believe that the Fed will not ramp up prematurely and are confident that its communication with the markets will be transparent.

But they recognize the risks.

“The Fed has said they would like to see more inflation in the United States, they have indicated that they would have some tolerance for inflation,” Reserve Bank of South Africa Deputy Governor Fundi Tshazibana told Reuters.

“What we all don’t know is what that tolerance band is.”

(Reporting by Leika Kihara in Tokyo, Mfuneko Toyana in Johannesburg, Karin Strohecker in London; Additional reporting by Jonathan Spicer in Istanbul, Simon Johnson in Stockholm, Swati Bhat in Mumbai, Gwladys Fouche in Oslo; Written by Sam Holmes and Leika Kihara; Editing by Kim Coghill)

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