Monetary policy divergence between emerging and developed economies is gaining traction in contrast to 4Q 2008 and 2009 when policy rates took an abrupt shift to the downside, being cut at a fast pace, with most central bankers opting to support growth and avert the hanging cloud of recession.
Latin American countries such as Chile and Brazil slashed their benchmarks by 7.75 percent and 5 percent, respectively, while advanced countries, notably the euro zone and the UK slashed their respective rates by 1.5 percent to unprecedentedly low levels.
The reduced interest rate differentials that were dictated by economic weaknesses and structural deficiencies at the height of the crisis is in stark contrast with the divergence seen of late, as the emerging world try to support currencies and contain the fallout from capital outflows.
The susceptibility of emerging markets, especially those with persistent current and fiscal accounts deficits will most likely result in rising policy rates going forward.
As for advanced economies, the US tapering exercise is in full swing, with the FOMC in its last four meetings opting to cut $40 billion from its quantitative easing program, which currently stands at $45 billion.
Apparently, the positive data stream from the US concerning housing and employment have supported this trend.
Unemployment had fell to 6.3 percent recently while housing prices continued to rise in the double-digits around 13 percent, resulting in positive wealth effects that will underpin consumption.
It seems policy normalization in the US will continue unabatedly even though the Fed had altered to a qualitative rather than a quantitative approach, dropping the 6.5 percent unemployment threshold for mulling an interest rate increase.
Additionally, it is highly likely that the European Central Bank and the Bank of Japan will increase their monetary stimulus in the next couple of quarters, with the former driven by deflationary risks that had seen the eurozone inflation benchmark well below half the 2 percent target rate and with the latter supporting the economy from an expected drag from the hike in value added tax.
In my opinion, the fact that the world economy continues to experience a multi-stage growth, given the deviating economic outlooks for the advanced and emerging countries, will result in policy divergence on the monetary front.
The volatility that prevailed during the first quarter of this year was a testimony that investors are becoming more skeptical and selective when choosing where to invest.
— Tamer El Zayat is a senior economist at the National Commercial Bank, Jeddah. Twitter: @ZeEconomist
