16 Mar 2019 21:09 IST

The changing stance of central banks

The banks' shifting position indicates possible turbulence in the global economy up ahead

The major global central banks, including the US Federal Reserve (Fed) and the European Central Bank (ECB), seem to have decided to go slow in making their monetary policy decisions this year. This is contrary to their stance last year. Here we take a look at the factors that have triggered this change in position.

The background

In December 2017, the US Fed had indicated that there will be three rounds of interest rate hikes in 2018. But the rates were increased four times that year. The US economy witnessing strong growth in 2018 was a major reason for the Fed increasing the pace of interest rate hikes.

The Fed had projected US growth at 2.5 per cent in 2018, and this was raised to 3 per cent as the year progressed. Fed Chairman Jerome Powell had reiterated that growth in 2018 had been significant. “The year 2018 has been the strongest since the financial crisis,” said Powell at his December press conference last year.

The ECB, on the other hand, announced in June last year that it would stop its asset-purchases, that is the quantitative easing (QE) by December. Quantitative easing is one tool of monetary policy through which a central bank buys government bonds or other financial assets in order to increase money supply in the market. The ECB had introduced the bond purchasing programme in March 2015. The central bank halved the bond purchase from €60 billion a month in 2017 to €30 billion beginning January 2018. This was reduced further to €15 billion by September before winding it up totally by December.

The turnaround

Things seem to have turned around as the markets stepped into 2019, and the tone of the central banks has evened out. The heightened danger of global economic growth being impacted is one of the major reasons for this. The International Monetary Fund (IMF) had in January forecast that the global economy would grow at a slower pace in 2019 than previously anticipated — 3.5 per cent, down from the forecast of 3.7 per cent.

The central banks themselves have been revising the growth outlook lower over the last few months. The Fed expects the US economy to grow at 2.3 per cent, down from its earlier projection of 2.5 per cent. The Fed had raised concerns recently about uncertainty in the financial markets and the global growth slowdown. The Fed Chairman had said that the economy may not be as kind in 2019 as it was in 2018.

The central bank has clearly indicated that policy decisions in 2019 will completely depend on the incoming economic data. At the moment the Fed has forecast a total of two rate hikes in 2019. If global growth worsens, it may end up with just one rate hike in 2019. On the other hand, if the economy grows at a much faster pace that expected, there could be three or more rate hikes this year.

New stimulus from ECB

The ECB has also slashed Euro Zone growth prospects twice recently. Initially, it had cut the growth outlook for 2019 to 1.7 per cent in December from 1.9 per cent. In March, it cut the outlook substantially, down to a rate of 1.1 per cent.

The ECB has also announced it would launch a new series of quarterly targeted long-term refinancing operations (TLTRO) from September 2019 to March 2021. TLTRO is another type of stimulus programme to increase money supply in the market. TLTRO is a loan programme through which the ECB lends to Euro area banks at a much cheaper rate. In turn, the banks are expected to give their customers better credit terms and boost spending in order to support the economy.


The drastic shift in the central banks’ stance indicates that the global economy could see a turbulent ride ahead. However, a pause in the US interest rate hikes and the ECB trying to increase money supply could be positives for risky assets such as gold and equities. The prices of these risky assets may benefit from the change in stance of the central banks. However, the pace of rise in these asset prices could be slow if the global economic growth stalls.