For many years, central banks have dominated markets. Market participants and observers quivered at the power of monetary authorities. They try to parse every utterance from the central banks and each move by these authorities lead to traders rushing to safe haven assets or grabbing opportunities to obtain huge gains. However, now it seems like the financial markets are the ones doing the pressuring.
Take for instance, Australia and New Zealand. During the previous month, the Reserve Bank of New Zealand made a second interest-rate cut in 6 weeks, despite the rapidly increasing housing prices. Moreover, the central bank of Australia stated that a third interest rate cut this 2015 is up for discussion.
Monetary officials in the mentioned countries are known for their stubborn independence. With this, it is kind of hard to imagine that they would join others in a race toward ultralow interest rates. However, with China’s economy losing steam and prices of commodities declining, jumpy markets are urging bigger gestures from monetary authorities.
The central banks that are currently easing, including Europe, New Zealand, Japan and Australia, have all implied that borrowing costs may remain low for an almost indefinite period of time. Meanwhile, those that are inclined toward returning to normalcy, such as the Bank of England and the Federal Reserve, are committing to move slowly.
In general, once interest rates have declined across different parts of the world, monetary authorities tend to keep them down. Moreover, when the rates are finally tightened, the normal interest rate will be much lower than it used to be.
When you take a look at the situation in Japan, you realize that it is difficult for major central banks to reverse its easing policies after a big economic shock. Almost-zero interest rates are essentially the only thing that is keeping the debt load of the Asian country sustainable. Hence, it is almost improbable for BOJ Governor Haruhiko Kuroda to taper quantitative easing.
Even if the Federal Reserve Chair Janet Yellen was able to pull off an interest-rate hike before the year ends, she will be pressured to return to the policy framework that prevailed before the collapse of Lehman Brothers. On the other hand, the president of the European Central Bank Mario Draghi will also face rebellion in the Eurozone if he makes any tapering moves.
In my opinion, instead of pretending that they can get back to their normal rates, monetary authorities should come up with ways that will enable them to adjust to a world of low interest rates. These central banks should certainly urge governments to do their own part in boosting economic growth, and at the same time, make sure that the liquidity produced does not heighten financial risks.