Central Banks Exit Strategies Overview (05.01.2010)


With global recovery taking center stage, central banks are trying to find a way out of lose monetary policy. Yet, the task seems to be more difficult than many have expected since the wrong timing or technique of an “exit strategy” may destroy a still fragile growth.

Indeed, central banks all over the world have been very cautious in withdrawing fiscal stimulus measures. And although most of them have already decided to unwind non-conventional monetary policy measures, only a few moved to interest rates increases. More importantly, the division over timing of  an exit strategy” have been growing in last month's due to different GDP growth expectations. For example, the Reserve Bank of Australia has already increased benchmark interest rate four times while US Federal Reserve, the Bank of Canada, the Reserve Bank of New Zealand may start rising the cost of borrowing as early as second part of 2010. Yet, European Central Bank, Bank of England, Bank of Japan and Swiss National Bank are likely to wait much longer.

US Federal Reserve

Unlike most central banks, the US Federal Reserve focus has been more on supporting growth than in keeping inflation expectations stable. Indeed, there are clear signs that US economic growth is strengthening; the economy expanded  5.6%  in the last quarter of 2009 and 3.2% in first three months of 2010. However, the highest unemployment rate in almost 30 years and a weak housing market make the Federal Reserve very cautious in shifting its monetary policy. So far, the Fed has been preparing an exit from quantitative easing as easy money may create another bubble. Yet, for interest rate hikes the market will need to wait much longer. At the latest meeting on April 28, the Federal Open Market Committee renewed the pledge to keep interest rates at "exceptionally low" levels for "extended period". 

European Central Bank

So far, European Central bank has been in no rush to increase its official interest rate. In April, for  the 11th consecutive month the rate was left unchanged because the Euro Area recovery has been very sluggish and it is expected that GDP growth will remain below trend in the first few months of 2010. Also, although inflation rose in April to 1.5% , it is still lower than the ECB target  of 2%. Looking further, even though at its March meeting the ECB took more steps to withdrawal some of unconventional policy measures, fiscal sustainability of Greece and other European countries made the institution abandon plans to return to minimum collateral requirements that prevailed before the global economic crisis.

Bank of Japan

In the fourth quarter of 2009, Japan’s growth picked up finally, rising 3.8% from the previous quarter. Yet, a sustainable recovery is far from being achieved since most of growth came from various stimulus measures and improvement in overseas economic conditions which can be easily erased. Adding to that a still weak domestic demand and deflationary pressure (since February 2009 consumer prices have been falling) make us believe the  Bank of Japan will not on keep interest rates at record lows but also try to flood the market with cheap money. Indeed, at its last meeting on April 30, the BOJ has kept its benchmark rate at 0.1% and in March doubled a program of three-month, 0.1 per cent loans to banks from Y10,000bn ($110.6bn) to Y20,000bn.

Bank of England

In the United Kingdom, the economics recovery is still very sluggish. In the fourth quarter of 2009, British economy expanded 0.4% and in first three months of 2010 0.2%. Government actions to cut budget deficit (increase in Value Added Tax), sluggish growth in the Euro Zone (which is main exports partner) and a weak labor market seem to be weighting on the growth. So does the Bank of England has every reaso...


Anna Fedec, contact@tradingeconomics.com
4/30/2010 1:11:49 PM