Central Banks are never idle. But when more than one makes a surprise move, it can send financial markets rocking. And that is exactly what happened last month. The biggie was Switzerland's unanticipated decision to drop its three-year-old cap on the franc. Other central banks were quick to follow with Singapore taking the next step by maneuvering its exchange rate policy in order to ease the rise of its local currency.
As if this wasn’t enough for investors all over the world, the central banks in Russia and Canada announced their own interest rate cuts. Then India, Egypt, Peru and Denmark jumped into the fray. The Reserve Bank of Australia (RBA), Australia's central bank, cut its cash rate to an all-time trough of 2.25 percent on Tuesday.
Economists had predicted that the rate cuts would continue and indeed on Wednesday, the People's Bank of China cut the reserve requirement ratio (RRR) by 50 basis points to 19.5 percent - its first country-wide RRR cut since May 2012.
"We expect more central banks to surprise with either the timing or size of any monetary policy easing," said Rob Subbaraman, chief economist and head of global markets research, Asia ex-Japan at Nomura. “Within Asia, central banks in China, Thailand, Korea, India, Indonesia and Singapore are the ones to watch,” he said.
Projected Easing
Analysts are projecting that the Bank of Thailand could cut interest rates by 25 basis points on March 11th followed by another cut in the second quarter. Bank of Korea is expected to cut rates in April and July by 25 basis points while Bank of Indonesia is forecast to cut interest rates by 50 basis points in the first quarter of 2016.
In addition, the Monetary Authority of Singapore could further ease its nominal effective exchange rate policy band during its semi-annual monetary policy review in April.
Taimur Baig, Chief Economist, Asia at Deutsche Bank says this trend reflects growing nervousness among central bankers.
"Asian central banking counterparts are not sitting by idly while ECB (European Central Bank) and SNB (Swiss National Bank) dominate headlines; we have seen the RBI (Reserve Bank of India) and the MAS (Monetary Authority of Singapore) make off-cycle policy moves lately, reflecting a sense of urgency to act not seen in a while," he said.
Meanwhile, the world’s largest economy, the U.S., is moving closer to normalizing their monetary policy with the Fed announcing an expected rate hike which should further strengthen the U.S. dollar.
According to Baig, bank policymakers worldwide should indeed be thinking about rate hikes, not cuts. He believes, however, that easing inflation and improving external and domestic demand in many countries have switched the focus of central banks for the time being.