Central Banks Round-Up

Over the past few weeks I have visited with PIMCO’s clients in Asia, the Americas and Europe, and one issue investors often wanted to discuss was this: Are central banks around the world about to unleash an even bigger money glut, and what does it mean for markets?

As I noted earlier this month, three of the four major central banks (the People’s Bank of China, the European Central Bank and the Bank of Japan) do indeed appear set to ease policy further in the current quarter, and the fourth bank (the Federal Reserve) may hike in December, though it would be the most dovish hike in history. Here’s the rundown:

People’s Bank of China: The PBOC has delivered on further easing, and the 25 basis point (bp) cut in benchmark interest rates and the 50 bp reduction in banks’ required reserve ratios announced last week was just another step down a long staircase, with more likely to follow, including our forecast of another 50 bp cut in rates. True, recent indicators such as property sales, car sales and the manufacturing PMI tentatively suggest a stabilization of the Chinese economy. However, with deflationary pressures strong in the “old” economy and the “new” economy still suffering from the bursting of the stock market bubble, more monetary support is likely forthcoming. The hard landing for China’s economy likely doesn’t lie ahead, but is already behind us.

European Central Bank: The big story last week was Mario Draghi’s announcement that the ECB Council had not only discussed cutting rates more negative (though as my colleague Andrew Bosomworth points out, further rate cuts may not achieve the desired effect), but also agreed to study a wide range of potential adjustments to its asset purchase program. So the question for the next policy meeting on 3 December is not ifbut how the ECB plans to push inflation expectations and actual inflation closer to target.

Bank of Japan: The probability we will see a third round of qualitative and quantitative easing (QQE3) at this Friday’s BOJ meeting jumped with the ECB’s and the PBOC’s announcements. True, the BOJ does not appear to be interested in a meaningful further depreciation of the yen. Yet, given the 2% inflation target remains distant, and yen appreciation, which is more likely now that other major central banks are easing, is even less welcome than depreciation, the pressure is on the BOJ to do more, either this week or at the December policy meeting.

Federal Reserve: The Fed this week will have the choice to either acknowledge or ignore these developments. I don’t expect any surprises in Wednesday’s statement (and stay tuned to the PIMCO Blog for more coverage), but the minutes of this week’s meeting – which will be released on November 18 – will be key in shedding light on the “December or not?” question.

Bottom line: The money glut keeps rising, thus supporting risk assets and providing protection against global deflationary pressures emanating from emerging markets.