Central banks across five continents are undertaking the broadest reduction in borrowing costs since 2009 to avert a global economic slump stemming from Europes sovereign-debt turmoil.
The U.S., the U.K. and nine other nations, along with the European Central Bank, have bolstered monetary stimulus in the past three months. Six more countries, including Mexico and Sweden, probably will cut benchmark interest rates by the end of March, JPMorgan Chase & Co. forecasts.
With national leaders unable to increase spending or cut taxes, policy makers including Australias Glenn Stevens and Israels Stanley Fischer are seeking to cushion their economies from Europes crisis and U.S. unemployment stuck near 9 percent. Brazil and India are among countries where easing or forgoing higher interest rates runs the risk of exacerbating inflation already higher than desired levels.
Weve seen central banks that were hawkish begin to turn dovish against a backdrop of austerity in fiscal policy, said Eric Stein, who co-manages the $6.6 billion Eaton Vance Global Macro Absolute Return Fund in Boston. You could debate how bad it will be for growth, but it cant be good, he said of the challenges facing the world economy.
Global Rate
Monetary easing will push the average worldwide central bank interest rate, weighted for gross domestic product, to 1.79 percent by next June from 2.16 percent in September, the largest drop in two years, according to data and projections from JPMorgan, which tracks 31 central banks. The number of those banks loosening credit is the most since the third quarter of 2009, when 15 institutions cut rates, the data show.
Low short-term borrowing costs through at least the end of 2012 mean that markets that provide reasonably good interest income should perform well, said James Kochan, chief fixed- income strategist at Wells Fargo Advantage Funds. High-yield corporate-bond mutual funds are attractive, as are government debt in resource-rich countries including Australia and Norway, he said.
Theres a common theme almost throughout the world and that is either growth has been disappointingly slow or now its slowing, said Kochan, who helps oversee $213.6 billion and is based in Menomonee Falls, Wisconsin. Europes debt crisis has a lot of central banks very concerned because of its implications for exports from the U.S., China and other countries, he said.
Asia Inflation
While central banks in Australia and Indonesia have reduced borrowing costs and the Bank of Japan increased asset purchases in October, other countries in Asia may be slower to ease policy.
The Peoples Bank of China has raised its main interest rate three times this year to fight inflation. Indias central bank lifted rates on Oct. 25 by a quarter of a percentage point, while signaling it was nearing the end of its record cycle of increases as the economy cooled.
Most central banks will wait and see how the situation develops in Europe, said Joseph Tan, Singapore-based chief economist for Asia at Credit Suisse Group AGs private-banking division. If we do have a continuation of the political impasse in Europe and that leads to a recession in Europe, and the U.S. economy starts to slow again, then Asian central banks will cut interest rates.
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