The Reserve Bank of India (RBI) ploughed a lonely furrow as it raised its key policy rate by 50 basis points (bps) in 2018, only to roll it back just six months later. No other major central bank has reversed its own policy decision in such a short span, at least in recent years. Going forward, economists say, most central banks will hold on to their current policies, and for an extended period, given the slowdown in global growth.
It may be noted that RBI raised the repo rate from 6 to 6.5 per cent (25 bps each in June and August, 2018), but then reduced it to 6 per cent (25 bps each in February and April, 2019). In contrast, those central banks with an accommodative policy have kept rates unchanged since late 2015 and those who raised rates haven’t cut them despite adopting a dovish stance, observed
“Although central banks have turned dovish, they haven’t eased policies further, indicative of the limited room central banks may have for easing their monetary policy,” said Madan Sabnavis, Chief Economist, Care Ratings.
Of the 15 major central banks that frame policy rates for about 80 per cent of the global economy, seven — namely the US Fed, Bank of England, Bank of Canada, Bank of Russia, South African Reserve Bank, Bank of Korea and Central Bank of Turkey — raised rates by 25-100 bps in 2018. Turkey, for instance, saw an eye-popping 625 bps hike. But, they have since put rates on hold and have even issued a dovish outlook.
Others have stuck to an accommodative stance and kept rates low, with six including the European Central Bank, Bank of Japan, People’s Bank of China, Reserve Bank of Australia, Swiss National Bank and Reserve Bank of New Zealand not revising rates since 2015-16 following rate cuts of 5-25 bps. The Central Bank of Brazil was an outlier having reduced rates by 650 bps since 2017.
For most economies, inflation is currently below the central banks’ target. For instance, in the UK, South Africa, Russia and Turkey, average headline inflation over the past six months was above the target rate, while for advanced economies, it has been largely benign. “Inflationary pressures in 2018 were partly prompted by the tightening of monetary policies by various central banks in advanced and emerging market economies,” Sabnavis noted.
Globally, several economies are yet to return to pre-crisis levels and the normalisation of monetary policies is yet to materialise. Nearly a decade after sticking to a low interest rate regime and even ZIRP, monetary tightening first began with the US Federal Reserve in 2016-end and was subsequently followed by Bank of England, Bank of Canada and Bank of Korea based on improving economic outlook, increasing credit growth, strong labour markets and building up inflationary pressures. But, things took a marked turn in 2019, and with slowdown fears, there’s a perceptible shift in the global central banks’ monetary policy stance.