Central Bank’s Policy Stance – A Dovish Pivot
Both the FED and ECB remain cautious and have also signaled “less dovish” than what the markets anticipated, due to the uncertainties mentioned above.
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The US Federal Reserve (FED) board contemplated thoroughly before voting for this rate cut, the first of its kind after the 2007-2008 recession. However, the tone of the FED Chairman remained ‘neutral’ against ‘dovish’ expectations. The US benchmark rate was cut to the range of 2%-2.25% at the July meeting held this week. It was widely expected that the FED will launch a rate cut cycle beginning August and deliver 75 bps of cuts this year. The markets closed negative on the day as dovish sentiments were repriced. Now, the next rate cut of 25 bps is expected in November and there is a low probability of a rate cut in September.
It all started at the December 2018 policy meeting where the interest rate projections for 2019 were revised to two rate hikes (against the previous three rate hikes) and also by cutting the target rates for 2020 and 2021. Later, in the January 2019 policy meeting, the FED turned more dovish and quoted being ‘patient’ for future adjustments in the FED fund’s rate and an indication that it is preparing for balance sheet normalization. At the March 2019 policy meeting, the tone became more dovish by indicating no rate hike in 2019, and also cutting the median Fed rate for both 2020 & 2021 to 2.6 per cent from 3.1 per cent earlier.
The European Central Bank (ECB) has also turned dovish in its statements lately. The central bank, which was tapering its Quantitative Easing (QE) program, ended it in December 2018, and had earlier indicated that interest rates would be kept unchanged. The ECB, in its July meeting, kept interest rates on hold but signaled that more monetary easing is on the horizon. The ECB deposit rate is at -0.4%, which was last changed in the year 2016. The ECB kept interest rates on its refinancing operations and marginal lending facility unchanged at 0% and 0.25 respectively.
Other global central banks like those in the United Kingdom, China and India have also undertaken an easing in the monetary policy. The Reserve Bank of India (RBI) is set to cut interest rates at its August meeting possibly for the fourth time in a row. Relative to other Central banks, RBI seems more dovish if it delivers a rate cut at its August meeting.
The global economy has growth risks and central banks are taking corrective measures to prevent a sustained slowdown. FED Chairman Jerome Powell said that weak global growth, trade tensions and muted inflation are having an effect on the US economy. Uncertainty related to Brexit has also been an added pressure. Therefore, it has become necessary for major central banks to change their stance to “dovish”.
Central banks are not going for aggressive rates cuts as they did in the year 2007-2008 as global growth is not as dire. At present, the US economy is creating ample jobs with the monthly non-farm payroll data continuing to improve. The unemployment rate has hit a 49-year low in May and was at 3.7% in June. GDP rose to 2.1% in the second quarter, down from 3.1% in Q1 and inflation is lower than what US policymakers targeted. These are the few reasons why the Fed did not sound more dovish in its latest policy statement.
Both the FED and ECB remain cautious and have also signaled “less dovish” than what the markets anticipated, due to the uncertainties mentioned above. We can expect lesser rate cuts if growth improves in major economies. There is an agreement between US-China on trade and Brexit finally happens. At present, none of these scenarios are imminent and rate cuts are here to stay along with monetary easing for the time being.
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