The globe goes dovish
The reversal of quantitative tightening has now gone global.
The big picture: Emerging market central banks are now the most dovish they have been since 2009, Bank of America Merrill Lynch strategists said. Their findings were based on language in various central bank statements.
- Since the Federal Reserve's dovish turn in January, other central banks have followed suit, including the European Central Bank, Bank of England and Bank of Japan, with emerging markets now joining the action.
- "EM central banks have turned the most dovish since 2009 because of the mounting fears of a sharp slowdown evident across Asia and Europe in particular," David Hauner, head of emerging EMEA economics at BAML, tells Axios. "The source of the slowdown is weakness in China."
- The Fed's Lael Brainard said the U.S. central bank should stop reducing its balance sheet by the end of this year, since "balance sheet normalization process has really done the work it was intended to do."
- Bank of England's Gertjan Vlieghe said he wouldn't want to consider raising rates until he can see "evidence of growth stabilizing and inflation pressure rising."
- The ECB is expected to restart its TLTRO stimulus program in March.
- The BOJ cut its inflation forecasts and maintained its massive stimulus program, with governor Haruhiko Kuroda warning of growing risks.
- Chinese official data released Friday showed record high new loansin January after the People's Bank of China announced it would cut the amount of reserves banks are required to hold by 1 percentage point.
The move away from tightening policy comes as global debt levels have reached more than 300% of the world's GDP and emerging markets have taken on an increasingly unsustainable debt load.
- The world is now "pushing at the boundaries of comfortably sustainable debt," IIF's managing director of policy initiatives Sonja Gibbs told Axios last month.
Why it matters: Loosening monetary policy tends to boost economic growth but also weaken local currencies and create asset bubbles. That puts added stress on countries' debts, which for many emerging markets are issued in dollars, euros or renminbi rather than their own currencies.
- That means that if things don't go well, they increase the likelihood of defaulting on their sovereign debts, endangering bondholders around the globe.
Go deeper: Emerging markets go mainstream