Policy rate divergence is not a narrative that will last for long
livemint.comAfter a period of relative uniformity among major monetary authorities, it’s suddenly fashionable to talk of divergence in the path of interest rates. Unfortunately, this easy description papers over some important—and subtle—differences that have emerged over the past year. Such course corrections are healthy.
The US central bank, the Federal Reserve, is not the only show on earth. When traders speak about separation in the direction of borrowing costs, what they tend to mean is that one of two central banks from the G7 are doing something before the Fed. The notion has been given momentum by rate reductions from the Bank of Canada (BoC) and European Central Bank (ECB).
They followed similar steps by Sweden and Switzerland. Protagonists play down the risks of moving before Washington: We do what our domestic conditions warrant, we don’t have to march in lockstep. Yes, we are worried about dollar strength, but we are sovereign, etc.
In decades of covering central banks and markets, I have heard a lot of that talk. Sometimes, there is substance to it. Of course, officials have domestic mandates and, absent crises, must be guided by the local terrain.
But look at a broader horizon and there’s a noteworthy fading of synchronization that doesn’t get as much attention. Important central banks in Latin America have been trimming rates for a while: Brazil has been at it since August, while Mexico, Chile and Peru have also made policy easier. China didn’t hike at all, and economists are pencilling in a few cuts.
The Reserve Bank of New Zealand considered resuming tightening, while its Australian counterpart has repeated ad nauseum that nothing is ruled out. Indonesia surprised with an increase. The separation represents a shift
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