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JAKARTA (TheInsiderStories) – The acceleration in global growth that occurred in 2017 led some key central banks to begin a steady—albeit slow—tightening of monetary policy, said IHS Markit in the latest report. It said, the Federal Reserve, the Bank of Canada, and the Bank of England were in the vanguard.

Furthermore, the observer said, other central banks  in Mexico, India, Indonesia, and the Philippines followed suit. With growth still strong in the first half of 2018, this tightening bias remained in place.

However, because of rising trade tensions and the global slump in manufacturing, growth began to weaken during the second half of the year. With inflation showing no signs of accelerating, central banks responded accordingly.

United States Federal Reserve (The Fed) initiated its now-famous “pivot” by indicating there would be fewer rate hikes in the near future and the reductions in its balance sheet would be more measured.

The European Central Bank (ECB) —after stopping its bond purchases—announced new long-term loans to banks and signaled that any rate hikes were a long way off. The apparent end of the mild tightening cycle—and the possible beginning of a new mild easing cycle—will have multiple ramifications.

Some central banks have also begun to ease in Canada, Meksiko, Rusia, India, Indonesia, and the Philippines. Others will likely follow—or at a minimum, leave interest rates on hold for a while. The lack of further tightening—and in some cases, easing—will help to stabilize growth and limit any further deceleration.

Long-term interest rates in many parts of the world will likely fall further. On balance, these moves are likely to mean weaker currencies in those economies where central banks have taken bolder easing actions—in particular, the Fed’ pivot will reduce depreciation pressures for many economies, allowing central banks to ease even more.

“With growth and inflation expected to remain low, the risks to the interest rate outlook are skewed to the downside,” said IHS Markit.

Yet most major central banks have been hinting at a move away from hiking rates, and IHS said they were confident the global tightening cycle was over.

The Fed during the next two years is expected muted inflation and few signs of significant fiscal imbalances provide the central bank with an opportunity to be patient as it awaits further information. The late-2019 rate hike is expected to be the final rate hike for this tightening cycle.

IHS projected real GDP growth will slow in 2019 to roughly a trend pace, and inflation will firm to above 2 percent. These projections are consistent with one more Fed rate hike in late 2019, which would raise the upper end of the target range for the federal funds rate to 2.75 percent.

While The ECB near-term focus will be the technical preparations ahead of implementing the TLTROs from September. IHS expects a further extension of forwarding guidance on policy rates beyond the current reference date of end 2019, most likely in third quarter 2019.

But, the impact of the ECB’s March policy announcements is likely to be marginal. More implicitly, they will provide continued long-term liquidity to Italian banks, whose funding costs have risen following rising concerns about sovereign debt sustainability, IHS predicted.

Meanwhile, the Bank of Japan (BOJ) is predicted not to change its monetary policy plan during the next two years given core consumer price inflation will probably not exceed 2 percent in a stable manner. Even if the BOJ were to introduce any adjustment of its monetary policy, the impact on growth and inflation should be marginal, given that the bank has maintained it’s extraordinary monetary easing measures for more than five years following a nearly zero policy rate since 2010.

Similar things happen to Bank of England (BOE). Despite tight labor market conditions, the BOE is unlikely to raise interest rates at its May meeting or any time soon, amid concerns that prolonged Brexit uncertainties continue to damage activity. Diminishing Brexit risks should trigger a hike to 1.0 percent in May 2021, then to 1.25 percent in May 2022.

The BOE’s conditioning path for the Bank Rate implied by forwarding market interest rates suggests the end values for the policy rate will be 0.9 percent in 2019, 1.0 percent in 2020, and 1.1 percent in 2021. The lack of urgency to raise interest rates reflects the fear of making a policy mistake at a time when its economy is faltering because of entrenched uncertainty from when and how the country will exit the European Union.

Meanwhile, the People’s Bank of China (PBOC) is estimated to remain accommodative at least through the end of 2019. The PBOC is unlikely to aggressively open the liquidity spigot, though. De-risking the financial system, which includes containing China’s high leverage, remains a key policy objective.

The financial system de-risking campaign that began in 2017 was interrupted by trade negotiations with the US. To combat the growth slowdown and avoid excessive credit expansion, the Chinese government has also launched fiscal stimulus measures, including tax and business fees cuts.

IHS noted monetary easing’s impact on inflation should be limited. China’s consumer price inflation has remained tame and comfortably below the government’s 3 percent target. The expected domestic demand stabilization should not produce inflationary pressures given China’s remaining excess capacity and supply conditions.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com

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