Policymakers await results of steps taken to loosen global financial conditions

The US Federal Reserve, European Central Bank and Bank of Japan are in no rush to drive rates any lower, especially in Europe and Japan. (Reuters)
Updated 03 November 2019

Policymakers await results of steps taken to loosen global financial conditions

  • Big central banks around the world move to wait-and-see mode following burst of interest rate cutting

WASHINGTON/FRANKFURT/TOKYO: A concentrated burst of interest rate cutting and other measures to loosen global financial conditions by the world’s central bankers looks to have largely run its course, and policymakers now appear content to wait and see if their handiwork staves off a deeper slowdown in the months ahead.

Led by the US Federal Reserve’s nearly yearlong pivot away from a tightening bias, rate setters from Australia to Brazil and the eurozone to the Philippines have lowered borrowing costs in recent months to blunt the headwinds from global trade tensions headlined by the standoff between Washington and Beijing.

It is an easing wave that appears to have crested for now.

For their parts, the Big Three in the central bankersphere — the Fed, European Central Bank (ECB) and Bank of Japan (BoJ) — are in no rush to drive rates any lower, especially in Europe and Japan where they are already in negative territory.

The Fed last week cut rates for the third time since July, but officials emerged from the meeting with a near-explicit declaration to expect no more for the moment.

In Europe, meanwhile, a changing of the guard at a deeply divided ECB likely means that its September rate cut will not be followed in the near future, with their focus instead being on jawboning the trading bloc’s political leaders to step up their own efforts at stimulus.

In Japan, a BoJ weary of expending its limited ammunition has so far avoided cutting rates at all in the latest global wave. It would prefer to hold fire for as long as possible, relying instead of pledges of more accommodation in the future should it be needed.

And in the developing world, the pace of easing has slackened notably from a crescendo reached in August, although October marked the ninth straight month of net rate cuts by emerging market central banks.


How long a pause?

To be sure, the factors allowing policymakers to take a breather may prove fleeting — on the trade front in particular.

In mid-October the International Monetary Fund (IMF) pinned the blame on the US-China trade war when it slashed its global growth forecast to the slowest pace since the 2008-2009 financial crisis.

The dispute, initiated by US President Donald Trump, is in a state of detente as the two sides work to complete “Phase One” of a wider deal. But the erratic American president has abruptly changed stance before and may again.

Still, the messaging in the past two weeks from central bankers in Frankfurt and Tokyo was consistent with the Fed’s new stance: Let’s see how what we have done plays out.

“We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook,” Fed Chair Jerome Powell said in his press conference last week after the US central bank cut its benchmark rate by a quarter point to a range of 1.5-1.75 per cent.

A solid upside surprise on job growth in October only cemented that view. “We’ve done the adjustment,” Fed Vice Chair Richard Clarida said in an interview on Bloomberg TV after Friday’s payrolls report.

The ECB has restarted a €2.6 trillion bond-buying program after cutting its interest rate on deposits in September. Back then investors were betting on two further rate cuts by March of next year, but have since pared their expectations as deep divisions emerged among ECB policymakers on the path ahead.

New ECB President Christine Lagarde, who took office on Friday, will have to heal a rift between representatives of cash-rich countries such as Germany, the Netherlands and France, who opposed the decision to resume bond purchases, and the struggling periphery.

The former managing director of the IMF has struck a balanced tone, saying an accommodative monetary policy was needed but also had side effects that needed monitoring.

The issue is that the economic benefits of pushing the deposit rate, currently at -0.5 percent, further below zero are dubious. Mario Draghi, who just turned over the reins to Lagarde, acknowledged in his farewell speech that the negative rate was “not delivering the same degree of stimulus as in the past” because the return on investment in the economy had fallen.

The BoJ decided to hold fire on Thursday and instead buy time with a tweak to its forward guidance. It now pledges to keep rates ultra-low or even cut them for as long as necessary to gauge whether overseas risks have heightened enough to erode the economy’s path toward achieving its 2 percent inflation target.

While Gov. Haruhiko Kuroda has stressed the BoJ still has room to deepen negative rates or take any other steps to spur growth, many analysts see last week’s decision as underscoring the central bank’s desperation in trying to save its dwindling ammunition for when the economy takes a turn for
the worse.

Communication will remain a key challenge for the BoJ even under the new guidance, which removed a specific timeframe on how long interest rates will stay low.

“It’s wise the BoJ ditched a calendar-based commitment. But it’s hard to tell whether the BOJ committed to keep rates long for a longer period than it previous did ... and how much lower it could bring down rates,” said Nobuyasu Atago, a former BoJ official who is now chief economist at Okasan Securities.

Russia vows cooperation with OPEC to keep oil market balanced

Updated 21 November 2019

Russia vows cooperation with OPEC to keep oil market balanced

  • Moscow not aiming to be world’s No.1 crude producer, Putin tells annual investment forum

MOSCOW: President Vladimir Putin said on Wednesday that Russia and the Organization of the Petroleum Exporting Countries (OPEC) have “a common goal” of keeping the oil market balanced and predictable, and Moscow will continue cooperation under the global supply curbs deal.

OPEC meets on Dec. 5 in Vienna, followed by talks with a group of other exporters, including Russia, known as OPEC+.

“Our (common with OPEC) goal is for the market to be balanced, acceptable for producers and consumers and the most important — and I want to underline this — predictable,” Putin told a forum on Wednesday.

In October, Russia cut its oil output to 11.23 million barrels per day (bpd) from 11.25 million bpd in September but it was still higher than a 11.17-11.18 million bpd cap set for Moscow under the existing global deal. Putin told the forum that Russia’s oil production was growing slightly despite the supply curbs deal but Moscow was not aiming to be the world’s No. 1 crude producer. Currently, the US is the world’s top oil producer.

“Russia has a serious impact on the global energy market but the most impact we achieve (is) when working along with other key producers,” he said. “There was a moment not that long ago when Russia was the world’s top oil producer — this is not our goal.”

Russia plans to produce between 556 million and 560 million tons of oil this year (11.17-11.25 million bpd), Energy Minister Alexander Novak said separately on Wednesday, depending on the volume of gas condensate produced during cold months.

Russia will aim to stick to its commitments under the deal in November, Novak told reporters.

Russia includes gas condensate — a side product also known as a “light oil” produced when companies extract natural gas — into its overall oil production statistics, which some other oil producing countries do not do.

As Russia is gradually increasing liquefied natural gas production (LNG), the share of gas condensate it is producing is also growing. Gas condensate now accounts for around 6 percent of Russian oil production.

Novak told reporters that in winter, Russia traditionally produces more gas condensate as it is launching new gas fields in the freezing temperatures.

“We believe that gas condensate should not be taken into account (of overall oil production statistics), as this is an absolutely different area related to gas production and gas supplies,” he said.

Three sources told Reuters on Tuesday that Russia is unlikely to agree to deepen cuts in oil output at a meeting with fellow exporters next month, but could commit to extend existing curbs to support Saudi Arabia.

On Wednesday, Novak declined to say that Russia’s position would be at upcoming OPEC+ meeting. Reuters uses a conversion rate of 7.33 barrels per ton of oil.