JAKARTA (TheInsiderStories) – The global economy has move to its slowest pace in three years time. While, international trade and investment have been weaker than expected at the start of the year with the economic activity in major advanced economies, somes large emerging market, and developing economies have been softer than previously anticipated.
A number of risks could disrupt that delicate momentum like a further escalation of trade disputes between the world’ largest economies renewed financial turmoil in emerging and developing economies, or a more abrupt deceleration of economic growth among major economies than is currently envisioned.
In various global forums, International Monetary Fund (IMF) Managing Director Christine Lagarde warned that global economic growth is on the decline. The fund has cut its global growth forecast from 3.7 to 3.5 percent cause the accelerating economic risks amid the United States (US) – China trade war, Brexit, and geopolitic tension in the middle east.
Central banks are responding and signed that the global economy is losing momentum. The World Bank expects the global economy to expand 2.6 percent this year, due to falling trade and investment flows, in what would be the slowest expansion since 2016.
While the global trend may be toward lower interest rates. US Federal Reserves (Fed) is likely will cut June interest rate.
On June 4, Fed’ chairman Jerome Powell hinted towards the central bank’ willingness to make monetary policy adjustments, if needed, to keep the US economic expansion on track.
A few days ago, the US Department of Labor issued the Consumer Price Index which only rose 0.1 percent in 2019. On an annual basis, the figure was at the level of 1.8 percent or down compared to the previous month at 1.9 percent. This indicates an economic slowdown in superpoCwer’s country.
All month long, US’ President Donald Trump continued to pressure the central bank to fulfill his desire to reduce benchmark interest rates. Evidently, there are reports that reveal that since the beginning of this year, White House lawyers have sought to explore legal legality to disarm Powell from his position.
Trump has repeatedly attacked Powell for raising interest rates. The head of state claimed the Fed’ rate hike last year weakened economic and trade policies, especially when he struggled to overcome the problem of trade with China. Last October, Trump said the Fed was ‘crazy’ under Powell.
Trump’s anger grew even higher when on Tuesday the European Central Bank (ECB) Governor Mario Draghi signaled he would relax policies to deal with low inflation throughout the Atlantic. Responding to that, Trump said the policy benefits Europe and is unfair to the US. He said he wanted to be given an equal competition space and so far had not received it.
The comments added to pressure on Powell who faced financial market expectations for three interest rate cuts until the end of the year. This was triggered by weak economic data. So it is reasonable if the central bank is likely to reduce interest rates earlier than previously predicted.
US monetary policy has an outsize effect on central banks in emerging markets because of its influence over global flows of capital and currency moves. When the US raises rates, it encourages investors to bring their capital back home, forcing developing countries to follow—even if their economies are slowing—to keep their currencies steady and avoid a surge in inflation as the prices of imports rise.
We rated, when the Fed is easing, others can follow suit, and indeed sometimes have to avoid appreciations in their currencies that would hurt exports and push inflation down.
As reposted, recently, the central banks around the world are cutting interest rates, with Russia the latest example, as expectations of easier money in the US give developing markets the room to stimulate their economies.
The Russian central bank cited the recent change in course by the Fed toward looser monetary policy in its decision to lower its key interest rate by a quarter-percentage point to 7.5 percent.
Since April, India, Malaysia, and the Philippines all have lowered rates, while China’ central bank has taken steps to encourage more bank lending. On Thursday, India cut interest rates again by 25 bps, the third time since last February.
The dovish step was taken after the latest data showed the country’s economy recorded the slowest growth in the last four years. Australia also lowered its benchmark interest rate to the lowest level in history.
The central bank cut 25 basis points (bps) so that its benchmark interest is now at 1.25 percent. The South African Reserve Bank could cut borrowing costs this summer to help counter an economic contraction there. The bank has been criticized for not slashing rates more aggressively as South Africa battles with high unemployment.
Indonesia, Egypt, Mexico and South Korean could also follow suit. Bank Indonesia (BI) Governor Perry Warjiyo recently stated there is a room to cut interest rates, raising the prospect of the domestic economy easing monetary policy in the face of growing risks to growth.
Now, global eyes directed to Powell’ monetary action. If he take wrong decision is estimating will give a bad signal to the market and creating more confuse to the economic leaders on how to avoid the impact.
Written by Lexy Nantu, Email: email@example.com