The dollar has declined 1.1% against a basket of 10 leading global currencies in the last month, according to the Bloomberg U.S. dollar index.
Some central banks in emerging markets are already acting. Chile unexpectedly lowered its benchmark rate by a quarter point to 4.75% on Oct. 17, pointing to weaker growth, inflation and the global outlook. Israel surprised analysts on Sept. 23 when it cut its key rate a quarter point to 1%, the lowest in almost four years.
“With the dollar much weaker in recent days and weeks, you’ll see central banks that were reluctant to ease start to do that now,” said Thierry Wizman, global interest rates and currencies strategist at Macquarie Group Ltd. in New York. “They can be less worried about capital flight if the Fed isn’t tightening policy, and the strength in their currencies is probably imparting some disinflation into their economies, giving them a window to cut rates.”
Hungary, Latvia, Romania, Serbia, Sri Lanka, Egypt and Mexico have also eased since the start of September although Indonesia, Pakistan, Uganda and India tightened with the latter softening the blow by relaxing liquidity curbs in the banking system at the same time. Chinese policy makers have also been draining cash from the financial system.
Even those central banks with limited room to act are using so-called forward guidance to deter investors from betting on an imminent increase in rates. The ECB vows to keep its main rate at 0.5% for an “extended period” and the Bank of England is pledging to maintain its benchmark at the same level at least until unemployment falls to 7%, which it doesn’t expect to happen for three years. The Bank of Japan is trying to expand its monetary base by 60 trillion to 70 trillion yen ($720 billion) to bring inflation up to 2%.
The Fed also depends on forward guidance as a policy tool. Officials have repeated in every policy statement since December that their target interest rate will remain near zero “at least as long as” unemployment exceeds 6.5%, so long as the outlook for inflation is no higher than 2.5%.
“It’s hard to look around and see much changing on the rate front,” said David Hensley, director of global economic coordination at JPMorgan Chase & Co. in New York, who forecasts the average interest rate in developed economies to hold close to the current 0.40% for another year.
The cheap cash may come at a price that policy makers will have to pay later if it inflates asset bubbles. Germany’s Bundesbank said this week that apartments in the country’s largest cities may be overvalued by as much as 20%. In the U.K., BOE officials are rebutting suggestions of a housing bubble. Asking prices in London jumped 10.2% in October from the prior month, Rightmove Plc said Oct. 21.
Swedish and Norwegian property markets are also proving a concern to their central bankers, and policy makers in New Zealand and Singapore have already sought to cool demand. Meantime, U.S. stocks are heading toward the best year in a decade with about $4 trillion added to U.S. share values this year.
“The bubble conditions are going to remain in place,” Michael Ingram, a market strategist at BGC Partners LP in London, told Bloomberg Radio’s Bob Moon yesterday. “We could well see further stimulus.”
For now, such concerns are being overridden by a need to enhance economic expansion. The U.S. unemployment rate, at 7.2% in September, is still only the lowest since November 2008 and joblessness is 12% in the 17-nation euro area.
“Whatever their official mandates, central bankers are supposed to safeguard a nation’s real income,” Karen Ward, senior global economist at HSBC Holdings Plc in London, said in an Oct. 21 report. Labor markets from the U.S. to U.K. suggest “we shouldn’t fear a rapid withdrawal of global liquidity any time soon.”