A Central Banking Domino Effect Is in Motion
21 Marzo 2019 - 6:11AM
Noticias Dow Jones
By Brian Blackstone
ZURICH -- Abrupt changes in the policies of the world's largest
central banks have rippled through smaller economies, leaving them
with the prospect of low and even negative interest rates for years
to come despite having mostly healthy economies.
The danger is that these easy-money policies could fuel
destabilizing bubbles in real estate and other asset markets. They
may also leave banks with little ammunition to respond to the next
economic downturn.
Economies like Switzerland's, whose central bank signaled no
change in its negative-rate policies for years to come, are small
compared with the U.S. and eurozone. Still, they are home to major
global banks and companies that are sensitive to exchange rates and
financial conditions. With financial markets so interconnected,
problems in small countries can quickly spread to larger ones.
On Wednesday, the Federal Reserve left its key policy rate in a
range between 2.25% and 2.5% and indicated that it is unlikely to
raise rates this year. In late 2018, officials had signaled they
expected between one and three increases this year.
Two weeks ago, the European Central Bank went further, saying it
would launch new stimulus to support the eurozone economy via cheap
loans for banks. It also said it expected to keep its key interest
rate at minus 0.4% at least through 2019, a longer horizon than
before.
The Swiss National Bank said Thursday that it would keep its
policy rate at minus 0.75%, where it has been since January 2015,
and reduced its inflation forecast to 0.3% this year and 0.6% in
2020. The SNB cited weaker overseas growth and inflation and "the
resulting reduction in expectations regarding policy rates in the
major currency areas going forward."
Norway's central bank took an opposite turn, raising its policy
rate by 0.25 percentage point to 1% and signaled more increases
this year. Norway's reliance on oil production sets it apart from
other European countries because higher oil prices provide a
stimulus to its economy that its neighbors don't receive. Its
currency, the krone, rose about 1% against the euro after its
decision.
Still, Norway's bank lowered its long-term rate forecast, citing
"a more gradual interest rate rise among trading partners."
Here's why Fed and ECB decisions matter for countries that don't
use the dollar or euro: Switzerland and countries near the eurozone
but not part of it -- like Sweden and Denmark -- rely on the bloc
for much of their exports and imports. That makes growth and
inflation highly dependent on the exchange rate. Central-bank
stimulus tends to weaken a country's exchange rate, so when the ECB
embraces easy-money policies as it did two weeks ago it tends to
weaken the euro against other European currencies such as the Swiss
franc. Because the ECB is so large, Switzerland and others can do
little to offset it.
In a sign of Switzerland's dependence on ECB policy, the franc
strengthened slightly against the euro Thursday even after the SNB
cut its inflation forecasts. "They are hostage to the fortunes of
what the ECB does," said David Oxley, economist at Capital
Economics. Many analysts expect the SNB to stay on hold this year
and next.
Like Switzerland, central banks in Sweden and Denmark have had
negative policy rates for many years, and analysts say that is
unlikely to change soon. Capital Economics expects Sweden's
Riksbank to keep policy rates -- including a minus 1% deposit rate
and minus 0.25% lending rate -- on hold into 2021. It is set to
make a policy decision next month.
"The gravity pull is very strong" from the Fed and ECB, said
Sebastien Galy, macro strategist at Nordea Asset Management. "The
consequence is [non-euro central banks in Europe] mostly end up
importing policy from the ECB, so you end up with housing bubbles
and a misallocation of capital."
The negative interest-rate policies are also costly for
commercial banks. In Switzerland, banks have paid the SNB nearly 7
billion francs ($7 billion) to store funds since 2015. Danish banks
have paid 3.1 billion kroner ($0.5 billion) since 2014 as a result
of their central bank's negative deposit rate, currently at minus
0.65%.
It isn't just Europe that is affected by the actions of big
central banks. On Thursday, Bank of Korea Gov. Lee Ju-yeol signaled
he would maintain the current pause in policy tightening, saying
the Fed's "more-accommodative-than-markets-expected" statement
would allow his bank "more leeway" in taking action.
The BOK last raised rates in November, and the consensus among
economists is that it will now stand pat this year.
Indonesia's central bank kept rates unchanged for a fourth
meeting in a row Thursday, after having last rates them in
November. The Philippine central bank stayed its hand, too.
With the Fed expected to keep rates on hold into 2020, "this may
afford Bank Indonesia a window to reverse its stance and cut policy
rates in the near term.," and give the Philippines leeway for an
easier stance, said analysts at ING Bank.
Write to Brian Blackstone at brian.blackstone@wsj.com
(END) Dow Jones Newswires
March 21, 2019 07:56 ET (11:56 GMT)
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