Fast and furious: Hold tight, the global rate cut race is on

Twenty four nations and counting. That’s how many countries have cut rates since the start of this year.

To be sure, it’s a breath-taking pace: from Peru to Australia, developed and developing countries are rushing to cut their benchmark interest rates and/or introduce other easing measures as they struggle to cope with disinflationary trends and slowing growth prospects.

Here’s a chart created out of data collated from media reports of the key monetary policy measures launched in different parts of the world.

centralbankrates

Why this rush to cut rates now? Apart from the general reasons of slowing growth and tumbling commodity prices (in particular, oil), which have led to declining inflation trends, it’s important to note that there could be another plausible explanation.

The US seems set to raise interest rates this year , albeit modestly, and in the past, any hike in interest rates in the US tends to encourage money to flow out of emerging market assets into dollar-denominated ones (US stocks and Treasuries).

Central banks, especially in emerging markets, will be mindful of that trend.

One way to fight outflows is to hike interest rates. But that can’t be done effectively if interest rates are already high and a further tightening risks choking off economic growth.

A way out, therefore, would be to cut rates now in the knowledge that these cuts will be temporary and will be raised around the time when the US Federal Reserve decides to raise rates.

Basically, it’s a matter of getting their rate cuts in before they lose their chance to do it later altogether.

It’s a gamble no doubt, but one that central banks seems willing to take given that oil prices have plunged more than 50% from their peak over the past seven months.

For many emerging economies, high oil imports are one reason for their high current account deficits, so lower commodity prices (which reduce the current account deficit) offer the breathing space that central banks need to justify rate cuts. But it is hard to believe that oil prices will stay low forever.

It will be interesting to watch how long the rate-cutting parade lasts.

[Image Credit]

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