Maximum central bank support marks new phase for global recovery
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The pandemic recovery is in a new phase as several central banks begin or plan to withdraw emergency stimulus measures, gradually shifting from peak support and opening up divergences in international policymaking.
The Federal Reserve’s crab march towards when it cuts aid has cemented the global pivot, with counterparts in the UK, Canada, Norway, Sweden, South Korea and New Zealand among those who sketch maps for a step back.
China’s central bank has already shifted gears and is focused on controlling debt while making sure parts of the economy that still need cash get it. As recently as last week, Mexico, Hungary and the Czech Republic raised interest rates, after hikes earlier in 2021 from Brazil, Turkey and Russia.
The political turn is still expected to be slow, as the continued spread of Covid-19 variants makes it difficult to return to economic normality and most policymakers say inflation surges will subside. The European Central Bank and the Bank of Japan are signaling that they will maintain their easy money settings.
All in all, economists at JPMorgan Chase & Co. estimate that the average global interest rate will rise only marginally over the remainder of the year to 1.28% from 1.27% currently.
How the transition unfolds will nonetheless be a crucial test for the recovery and global markets. Go too fast and central banks risk undermining investors, damaging confidence and delaying the rebound; go too slowly and they could fuel inflation and worsen financial stability as house prices and other asset prices rise.
After acting in unions to reverse a recession as the pandemic hit, authorities moving at different paces also have implications for the markets. Last week in the eurozone, for example, stocks rose and bond yields stopped rising on bets that the ECB will lag behind the Fed.
The move beyond the monetary stimulus peak coincides with signs that the global rebound may subside as massive government spending wanes and Chinese growth slows. Although President Joe Biden is considering further large-scale fiscal stimulus for the United States, they are expected to be rolled out at a slower pace.
“The global rebound will begin to slow as the momentum for monetary stimulus, along with reopening and fiscal stimulus, begins to fade,” said Shane Oliver, chief economist at AMP Capital Investors Ltd. in Sydney.
Optimists say there is enough momentum in the recovery to withstand any central bank slowdown, and an outright tightening of financial conditions is still a long way off. Vaccination rates against Covid-19 are accelerating and continued fiscal stimulus will support growth, as will unlocking trillions of pent-up consumer demands.
Fed Chairman Jerome Powell said on Tuesday policymakers will be patient while waiting to raise borrowing costs, and the US central bank has yet to clarify when and how it will start cutting its asset purchase program .
“Monetary tightening is likely to be gradual,” said Mansoor Mohi-uddin, chief economist at Bank of Singapore Ltd. “If the Fed and other major central banks continue to convince investors and the public that inflation surges this year with economies reopening only temporarily, monetary conditions will likely remain loose over the next two years.”
History shows that managing the exit will not be easy. Attempts to wean markets off a drip-feed of cheap liquidity in the years following the global financial crisis have scared investors.
This dependence on official support is evident in the explosive acceleration of asset purchases by central banks. Chris Marsh, a former IMF economist who is now a senior adviser at Exante Data, calculates that the balance sheets of the G-10 central banks increased by $ 11 trillion between February 2020 and May 2021. This type of growth took 8 years to reach in the following period the financial crisis.
Speaking at the Qatar Economic Forum, billionaire investor Ray Dalio said he expected the Fed to achieve the desired results with relatively small actions, although he also signaled concerns about how the markets might react.
“It’s easy to say the Fed should tighten, and I think it should,” said Dalio, founder of Bridgewater Associates, the world’s largest hedge fund. “But I think you will see a very sensitive market and a very sensitive economy because the duration of assets has become very, very long.”
For now, the US recovery and the potential for faster expansion in Europe and Japan give central banks a window to cut emergency aid, said Alicia Garcia Herrero, chief economist for Asia -Pacific at Natixis.
“Support for monetary policy has peaked,” she said. “And rightly so.”
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