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Trio of Central Banks Surprise Markets With Aggressive Rate Cuts - WSJ

AUGUST 13, 2019

Brian Blackstone


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ZURICH—Three central banks in the Asia-Pacific region lowered interest rates in a surprisingly aggressive fashion Wednesday as the fallout from the U.S.-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 U.S. and China.

Two of the central banks that reduced rates 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 reduced interest rates Wednesday for the first time this year, reversing a late 2018 increase. The European Central Bank signaled in July that it will consider injecting fresh stimulus when it meets in September.

With banks in the Asia-Pacific region moving again, the global easing cycle may turn out to be longer and deeper than previously expected. The Philippines central bank is expected to follow its Asian peers with another rate reduction on Thursday. 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.”

Watch: To cut or not to cut: the question for central banks now (Reuters)


One reason: with interest rates already ultralow 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 Wednesday “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% annual growth rates that central banks in wealthy countries consider optimal. This means policy makers 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 New Zealand’s central bank to make a one-quarter-percentage-point reduction. But it was double that size, to 1% from 1.5%. New Zealand “appears to be adopting the ‘sooner is better’ approach to monetary policy setting,” said analysts at ING Bank, in a research note.

Thailand’s central bank also surprised investors. The monetary policy committee cut its policy rate to 1.50% from 1.75%. 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% from 5.75%, deeper than investors expected and its lowest level in nine years as it tried to kick-start lending in Asia’s third-largest economy.

Watch: US-China Trade War : Trump formally labels Beijing a 'currency manipulator' (AFP)

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 ($8.2 billion) to 768 billion francs in July, according to the SNB’s monthly report Wednesday. 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 next phase of easing for Switzerland and other central banks in Europe depends critically on the ECB’s next steps. The ECB sent a strong signal last month that it was preparing a cut in its deposit rate, currently minus 0.4%, and announce a fresh round of bond purchases as soon as its next meeting on Sept. 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 ($33.7 billion) in December.

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

Write to Brian Blackstone at brian.blackstone@wsj.com : 

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