• Fed holds interest rates steady but signals increases to come

• European Central Bank holds rates steady and reaffirms ultra-easy monetary policy

• Bank of Japan tweaks policy to enhance flexibility

• Bank of England raises interest rates amid Brexit worries

• Reserve Bank of India increases interest rate, cautions on fiscal front

• ASEAN central banks remain on hold in the latest meeting

• Concerns emerge about the potential impact of trade policy

At least five central banks, across the emerging and the developed markets, have announced their monetary policies over the last two weeks, amid uneven global economic recovery trends.

While the Reserve Bank of India (RBI) and the Bank of England (BoE) hiked the interest rates, three others -- the US Federal Reserve, the Bank of Japan (BoJ) and the European Central Bank (ECB) -- decided to maintain status quo. However, the US Federal Reserve and the ECB have already sent out signals of possible tightening monetary policy approach in due course.

The actions by global central banks point to a synchronised withdrawal of stimulus measures which they embarked upon post the global financial crisis a decade back. In the ongoing rate cycle, emerging markets and developed markets should not be viewed with the same lens. While developed markets are normalising their reactions to their domestic developments, emerging markets have adopted a defensive strategy to maintain/ widen rate differentials and draw back capital flows, whilst stabilising their currencies.

In the past one year, many central banks across emerging markets have tightened their policy stance, including India, Malaysia, Indonesia, Turkey and Brazil, as their currencies have come under pressure.

Fed holds interest rates steady but signals increases to come

The Federal Reserve raised its already high marks for the state of the economy on August 1, refusing to bow to President Trump’s recent push for the central bank to pause its march toward higher interest rates. Federal Open Market Committee officials voted unanimously at the end of their two-day meeting to keep its policy Fed Funds Target Rate (FFTR) unchanged, at a range of 1.75% to 2.0% while at the same time, maintained its balance sheet reduction (BSR) program at USD40bn (of which USD24bn is UST and USD16bn is MBS), as scheduled.

However, the statement they issued keeps the Fed on track to raise rates next month and again in December, after two rate increases in the first half of the year. Its revised assessments of economic growth and the inflation rate could signal that those coming increases are even more likely than investors previously thought.

Source: BIMB Securities Research - 7 Aug 2018