The final week of 2020 ended with no central banks changing their policy stance but the last communique of the year – from the Dominican Republic – captured what promises to be the major economic shifts in 2021: rising inflation from higher food and commodity prices and a strong rebound in economic growth.
At this point the uniform message from central banks worldwide is that the ultra-loose monetary policy stance will remain in place as long as COVID-19 threatens economic activity.
However, cracks in the easy global monetary policy stance are beginning to appear.
Four central banks already tightened their policy stance in the second half of 2020 – South Sudan, Argentina, Turkey (twice) and Armenia – while Norway’s central bank pulled forward the date of its first rate hike, and the U.S. Fed and Taiwan have raised their growth outlooks.
In China and South Korea, countries that weathered the pandemic better than most countries, financial markets are already looking ahead to a normalization of monetary policy.
And stock markets worldwide have surged in the expectation the global economy will bounce back, boosted by the roll-out of vaccines and trillions of U.S. dollars in stimulus.
How inflation responds to the expected release of pent-up demand – if vaccines succeed in defeating the virus – and the rise in commodity prices on the back of a weaker U.S. dollar is thus critical in determining the state of monetary policy in 2021.
Until vaccines take effect, central banks will remain cautious and continue the overwhelming trend of 2020, illustrated by the most recent decisions by the Bank of Japan and the ECB to extend their support programs.
Looking back at 2020, central banks cut key interest rates an astounding 256 times compared with only 13 rate hikes, with most of the cuts in March as central banks marshaled a wide range of tools to avoid a global depression.
The global monetary policy rate (GMPR), the average interest rate by 99 central banks worldwide, plunged 1.51 percentage points this year to 4.18 percent from 5.69 percent at the end of 2019, 6.42 percent at end-2018 and 5.99 percent at end-2017.
Policy rates in 18 central banks have been slashed to essentially zero – 0.25 percent or lower – leaving quantitative easing (QE) as the only way forward to loosen monetary conditions further.
Thirty central banks began purchasing assets, both government and private securities, along with a flurry of other measures to loosen policy as the number of steps taken to ease monetary policy this year amounts to 417.
Prior to the outbreak of the pandemic and the near-shutdown of all global economic activity in March and April, QE was mainly used by central banks in advanced economies as an extraordinary tool when interest rates had been cut to the lower bound or in extreme circumstances such as wars.
The Fed, the ECB, the BOJ and BOE are estimated to have expanded their balance sheets by an estimated $8 trillion in 2020.
Central bank’s easing measures also extended to reserve requirements, which were cut 41 times, in some cases multiple times by the same central bank, while macro prudential measures have been loosened in synch with massive injection of liquidity to ensure banks and financial systems remain healthy so they can help engineer an economic recovery.
Countercyclical capital buffers or capital adequacy ratios, for example, were cut by 12 central banks.
Illustrating the speed with which central banks moved to counter the large, negative impact on economic activity from measures to contain the Covid-19 virus, interest rates were often cut at unscheduled meetings by monetary policy committees.
In 2020 interest rates were cut at 78 extraordinary policy meetings and other easing measures were taken at a further four policy meetings.
On top of this unprecedented easing by central banks, governments worldwide also injected trillions of dollars into their economies, boosting budget deficits by up to $11 trillion in 2020 and global debt loads even further to limit the economic impact of the pandemic.
Prior to the resurgence of COVID in November, central banks were beginning to take their foot of the stimulus pedal, with the pace of rate cuts easing to 3 in October from 10 in September, 9 in August,14 in July, 23 in June, 26 in May, 34 in April, and an astounding 91 cuts in March.
But with governments seeking to curtail the spread of the pandemic by restricting the movements of its citizens, economic activity in the fourth quarter is taking a hit.
The number of rate cuts in November rose to 11 and in December rates were cut 3 times.
In contrast central banks have only raised their rates 13 times but three of those (Czech Republic, Kyrgyzstan and Tajikistan) came pre-COVID-19 and two (Denmark and Kazakhstan) during the volatility at the height of the COVID crises to protect their exchange rates.
In total central banks have taken 16 steps to tighten their monetary policy this year as compared to 417 easing steps, i.e. policy has been tightened 26 times as often as loosened.
While the number of 2020 rate cuts counted by Central Bank News includes those by Zimbabwe, Vanuatu, Papua New Guinea,Tanzania, Liberia and South Sudan, the total size of the cuts is not included in the global average interest rate for comparison purposes.
Taking into account the 13 rate hikes this year from the Czech Republic, the Kyrgyz Republic, Kazakhstan, Tajikistan, Denmark, Zimbabwe, Congo,Turkey (three hikes), Hungary (a non-benchmark rate), South Sudan and Armenia, policy rates have been cut by a net 15,533 points.
But illustrating the threat to economic activity from the spread of COVID-19 and the measures to contain it, three of these banks – Kazakhstan, the Czech Republic and Tajikistan – reversed course after less than three months and started easing.
The cumulative percentage of all changes by central banks to their policy stance that favored an easing of monetary policy last week rose slightly to 96.3 from 96.2 the previous week, continuing to remain above 90 percent since week 10 (March 1 to March 7) of this year.
Since the end of January, when COVID-19 began to infect financial markets, central banks from tiny Vanuatu to the U.S. Federal Reserve have cut key interest rates 248 times.
The damaging effect on the global economy from the virus began to slowly emerge and then accelerate after Jan. 23, when China’s government imposed the “Wuhan Lockdown” on the industrial hub and city of 11 million people to contain the spread.
Illustrating just how interwoven the global economy has become, Sri Lanka’s central bank was the first central bank to refer to the coronavirus when it lowered its rate on Jan. 29, days before China’s central bank on Feb. 3 began to pump in liquidity to the banking system at lower interest rates.
Thailand’s central bank then followed suit by cutting its rate on Feb. 5 and since then rate cuts have come at a fast and furious pace, spanning the globe from Mongolia to Mauritius.
2021 POLICY DECISIONS BY MONTH
One central bank, Romania, cut its rate in January while no central banks have raised rates.
2021 POLICY DECISIONS BY MSCI CLASSIFICATION
Central banks worldwide haven taken 6 policy decisions in 2021, with policy rates cut once while there have been no rate rises. Source centralbanknews
DEVELOPED MARKETS: Central banks in developed markets have decided on monetary policy once in 2021, with policy unchanged.
EMERGING MARKETS: Central banks in emerging markets have decided on monetary policy 3 times in 2021 with no changes to policy.
FRONTIER MARKETS: Central banks in frontier markets have decided on monetary policy 2 times in 2021, with one bank cutting its rate: Romania.
OTHER MARKETS: Central bank in other markets have decided on monetary policy once in 2021, with no changes to policy.