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Speaking of monetary policy, I thought it would be interesting to look at the global central banks. Here is a chart for six of them for the past 10 years: European Central Bank (ECB), Bank of Canada, US Fed, Reserve Bank of Australia, Riksbank (Sweden), and the Bank of England (EDIT: after a request I added Japan).
Not surprisingly, they more or less move in synch with each other. Sometimes even cutting rates in quick succession to catch up with the leader. The outlier in this group is Australia. Not only did they take their rate higher than others, they also haven’t lowered it to match the others. But in the previous easing cycle (2001) they only came down to 4.25% also.
The Fed was the first central bank to lower key interest rates. The next was the Bank of Canada. The slowest among the 6 in the chart is the European Central Bank and Australia. These laggards have tried to make up for their mistake by making some incredibly deep cuts recently. I’m especially surprised by the 0.75 cut from the ECB.
The Bank of Canada will most probably deliver a 50 basis point rate cut when they meet next week, on December 9th.
Considering the swiftness of rate cuts, their global coordination, as well as their level in comparison to previous easing cycles, we are probably close to the end of the easing cycle. But, and I hate to say this, if this time is different, then who knows if history is any kind of a guide.
At this point, it is tempting to throw out all historical templates because they have done a monumentally poor job so far. While keeping in mind the danger of thinking that “this time it is different”, we are seeing signs that the world is undergoing a dramatic downturn in economic activity.
Just today, data was released showing the largest one month increase in unemployment in the US since the 1970’s - taking the unemployment rate to 6.7%. Add to that a swan dive in consumer confidence, an implosion in Detroit, melting real estate, etc.
It is safe to say that the central banks will continue to prioritize economic growth over inflation for the moment. Especially since we may very well experience a bout of deflation.
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