The policy moves of the global central bankers over the last two weeks highlight the precarious state of the global bond market and the limited headroom available to central banks to stave off a sustained slowdown. The Bank of Japan held its short-term interest rate target at -0.10 per cent in its policy meeting on Thursday, but indicated that it will decide on further easing in its next policy meeting. The Federal Reserve, while reducing the Fed Funds rate by 25 basis points, stressed the fact that the rate cut was due to the impact of global developments on growth and muted inflation pressures. The Fed Chairman had been under immense pressure to toe the line adopted by the European Central Bank, which had reduced interest rate on deposits by another 10 basis points to -0.50 per cent, last week. The ECB had also announced the resumption of bond repurchase of €20 billion every month from November. What was of greater interest is ECB chief Mario Draghi’s statement that governments need to now begin considering fiscal stimulus to improve growth.
While the Federal Reserve has been unwilling to move policy rates below zero, other central banks that have reduced rates aggressively in the aftermath of the global financial crisis are currently staring at a stalemate. It’s obvious that these loose monetary policies have not delivered the desired outcomes. Over the past decade, global GDP growth has not managed to top the 5.6 per cent rate recorded in 2007. Real GDP growth has been declining since 2017. World trade growth is also extremely weak. On the other hand, interest rates in many developed economies have moved below zero and the pile of debt accumulated through bond repurchase programmes has grown manifold. Bank deposit rates in many developed economies in Europe and in Japan are currently less than zero, penalising those who decide to park their money in banks; holding the investments in the form of cash becomes a better alternative. This is likely to pose a problem as savings of households are taken out of circulation. The banks in these countries are under duress due to depleting margins. The ratio of sovereign debt to GDP is hitting record levels in many countries, thus reducing the head-room for central banks to use monetary measures to address any future crisis.
The silver lining is that India and other emerging markets are in a relatively stable situation as they had adopted more conservative policies to tackle the 2008 crisis. With interest rates and sovereign debt in India at relatively comfortable levels, the RBI has the room to use monetary tools to provide a stimulus to the economy. That said, it will do well for the RBI and the Centre to continue with orthodox monetary policies. It is clear that simply printing money does not help growth. Draghi’s comments regarding use of fiscal measures should also be seriously considered, if India’s growth continues to skid.