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Lower for a Longer Time

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Ever since the trade war between US and China began, players within the finance arena have been living in consternation, worrying that a tweet from President Trump’s phone will send the world upside down. The relationship that is shared between two of the world’s largest economies is one that is mutually beneficial. The US economy is one that relies on debt due to excessive consumption, while China’s economy is one that is debt-reliant due to excessive investment. Thus, both economies rely on each other to arrive at a common point. The synergy obtained between them have resulted in global growth. Yet, should this relationship cease to exist, it will undoubtedly do more harm than good to society, on top of the aftereffects currently experienced. Central banks around the world are now resorting to different measures in response to the tricky relationship both US and China currently share.

At the same time, leading central banks have resorted to purchasing bonds, even after a $12 trillion purchase of financial assets were insufficient to revive inflation. Yet, the most conventional method remains to be monetary policy. In the US and Canada, the Federal Reserve is expected to hold rates on December 11 following three cuts this year on top of growing tensions, volatility and pressures from President Trump. Meanwhile, a day later, Christine Lagarde’s first monetary policy as ECB’s (European Central Bank) President is likely to not see any shift in decision. Both the economic outlook for the Federal Reserve and ECB are highly dependent on whether the US and China will be able to arrive at a common consensus on December 15th successfully.

Over in Latin America, Brazil is expected to cut interest rates by 50 basis points on December 11, arriving at a record low of 4.5%. In other parts of the world, the Turkish Central Bank is expected to continue to engage in monetary policy with economists forecasting a 150 basis-points reduction this coming Thursday. This is despite inflation regaining strength to achieve double digits increase in November. Additionally, Russia’s Central Bank will possibly witness an ease by 25 basis points. Moving to Asia, Philippines is predicted to leave interest rates as it is on December 12 while India’s central bank surprised investors by keeping interest rates unchanged last week. The snapshot  provides a brief look into the extent to which monetary policy is currently adopted.

Yet, Chief Economist at Bloomberg Tom Orlik noted that the pitfalls of Fiscal Policy have driven monetary policy first to its wit’s end and now to the point of breaking down. As a result, he warned that when the next downturn is imminent, it is the finance minister, not central banks that will be held responsible for coming up with a solution. True enough, the real worry lies within the next ten years. The growing fear that limited growth and inflation which have surrounded Japan since the 20 years ago will soon be a global pattern. Thus, despite the global adoption of monetary policy by Central Banks, it is crucial to be wary of its impotence.

 

 

 

By Caroline Wong 

 

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Caroline Wong

Caroline Wong is a Research Analyst at KOSEC – Kodari Securities. She writes on markets and focuses on ASX Top 300 companies. Email Caroline at c.wong@kosec.com.au.

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