Central banks and the next bubble (3)
Expectations are running high ahead of next week’s LTRO 2.0 (expected take-up is somewhat smaller than the first time and the previous estimate though, with Reuters poll predicting banks to grab c492 bln euros).
The ECB’s three-year loan operation, along with the BOJ’s unexpected easing, BoE’s QE and commitment from the Fed to keep rates on hold until at least end-2014 may constitute competitive monetary easing, Goldman Sachs argues.
As the moves to ease have been rolled out, we increasingly encounter the argument that such ‘competitive’ (non-coordinated) monetary expansions by developed market central banks are at best ineffective and at worst a zero-sum game at the global level—and perhaps a precursor of something worse, such as a slide towards protectionism.
Goldman’s calculation shows developed market benchmark yields have fallen by an average of around 30 basis points since the Fed started its $400 bln “Operation Twist” stimulus programme in August.
The current phase of easing, the U.S. bank says, is similar to the QE2 from Aug-Nov 2010, which resulted in a sharp spike in oil and commodity prices, a fall in the dollar and the famous “currency war” of competitive devaluation.
Goldman says while easing is still net positive for global growth, the ones who may struggle are, again, emerging economies.
Emerging markets face a more genuine dilemma when DM central banks ease aggressively, as was the case during QE2 and has been the case in recent months. This is because, with output much closer to potential and inflation at or above policymakers’ range of comfort, any stimulative leakage from a bout of monetary easing in the DM world is much less welcome.
Policymakers are forced to choose between allowing exchange rate appreciations that may be too rapid and accepting domestic overheating, which has its own negative ramifications.
In the long run, any significant correction of global current account balances is likely to involve a significant appreciation of EM currencies relative to the majors. But, in the short term, that still leaves a difficult balancing act to be performed, which means that for the EM world, these bouts of easing are a more ambiguous proposition.
To read the previous blog posts on this issue, click on the following: