“There is a concern at central banks that what we’re seeing is another false start in their economies,” said Michala Marcussen, global head of economics at Societe Generale SA in London. “We now need to see two to three months of better numbers before they’re willing to contemplate an exit again.”
After flirting for months with the idea of curtailing stimulus, the Fed said in September it would continue purchasing $85 billion of bonds a month, citing the need to see more evidence that the U.S. economy will improve. That came less than two weeks before a 16-day U.S. government shutdown that postponed releases of key data the Fed is relying on to guide its policy decisions. The Fed’s strategy also took a hit from this week’s news that employers added fewer workers to payrolls than projected in September.
The Fed will wait until March before slowing the pace of its third round of quantitative easing, according to the median estimate of economists in an Oct. 17-18 Bloomberg survey.
‘If you look at where we are economically, versus where we were a year ago, we’re virtually in the exact same place,” Gary D. Cohn, president of Goldman Sachs Group Inc., said yesterday in a Bloomberg Television interview with Stephanie Ruhle. “So if quantitative easing made sense a year ago, it probably still makes sense today.”
That leaves central banks elsewhere likely to maintain a bias toward easing. Moving to tighten before the Fed is ready to do so would drive up currencies against the dollar, to the detriment of exports, said Derek Holt, vice president of economics at Bank of Nova Scotia in Toronto.
The Bank of Canada, citing “uncertain global and domestic economic conditions,” yesterday omitted language it used in previous decisions referring to the expected “gradual normalization” of its benchmark rate, now at 1%.
The Riksbank kept its rate at 1% today and said it sees it at 1.15% in the fourth quarter next year, versus 1.25% in September. “The repo rate needs to remain at this low level until economic activity is stronger and inflation rises,” it said. Norway left its benchmark rate at 1.5% today, a month after signalling it will move toward tighter policy as house prices and consumer debt hover at record levels.
The Philippines also held its rate at a record low 3.5% to support Southeast Asia’s fastest growing economy as inflation stays within the central bank’s targeted range.
“There’s an easy-money bias across global central banks that probably will persist until about March or April,” said Holt. “The Fed’s decisions complicated the exit strategies for a lot of central banks.”
If the Fed’s delay extends the decline in the dollar, then the Bank of Japan and the European Central Bank also are more likely to add fresh stimulus, Fels said in an Oct. 20 report. The ECB is likely to offer banks another round of cheap, long- term loans in the first quarter, while the BOJ may ease more to offset a 2014 consumption tax increase, Citigroup Inc. economists said in a report yesterday.