Last week in global monetary policy Romania returned to its easing cycle while Gambia raised rates for the first time this year as central banks worldwide continued to position themselves in an increasingly uncertain international environment.
In addition to the pending shift in monetary policy in the United States and the United Kingdom, growing tensions in Ukraine and the Middle East now seem to be weighing on investors' mood, with commentators questioning whether the bull market in major stock markets is coming to an end.
After hitting 5-year lows in early July, the VIX - seen as a proxy for the global financial cycle - is moving higher, potentially foreshadowing a return of volatility in global financial markets.
Central banks have for months warned that investors may suddenly turn risk adverse and last week the central banks of Romania, India and Serbia joined the chorus.
The National Bank of Romania, which cut its policy rate by 25 basis points, said the main risks to its outlook stemmed from an increase in the volatility of capital flows in connection with a worsening of investors' risk aversion to emerging market economies from geopolitical tensions, the ongoing cross-border deleveraging and restructuring of some of Europe's banks, "as well as in the context of uncertainty surrounding the impact of possible monetary policy stance adjustments by major central banks worldwide."
The National Bank of Serbia, which maintained its rate, said this policy decision "took into account the persistent uncertainties emanating from the international environment, which may negatively impact the country's risk premium and foreign capital flows."
Raghuram Rajan, the respected governor of the Reserve Bank of India which maintained its rates, noted that capital flows into emerging markets had been rising recently.
"This implies, however, that EMEs remain vulnerable to changes in investor risk appetite driven by any reassessment of the future path of US monetary policy or possible escalation of geopolitical tensions," said Rajan.
In addition to his warning in RBI's policy statement, Rajan in an interview returned to one of his favourite themes: The lack of international cooperation in monetary policy.
Speaking with the Central Banking Journal, Rajan said the global economy bears an increasing resemblance to the 1930s when economies tried to pull out of recession at each other's expense.
But instead of competitive currency devaluations, countries are now using competitive monetary policy easing in a game that he says is bound to end in disaster.
Now, as then, "demand shifting" has taken the place of "demand creation." As in the 1930s, this lack of coordination is producing spillovers that may be difficult to control and the world's financial system may soon face fresh turbulence with a sudden shift in asset prices.
LIST OF LAST WEEK'S CENTRAL BANK DECISIONS:
- Romania cuts rate 25 bps on lower inflation forecast
- Australia maintains rate, still sees period of stable rates
- India holds rate, cuts SLR but warns of inflation risks
- Zambia maintains rate, sees results of past tightening
- Thailand holds rates, sees better H2 economic growth
- BOE maintains rate at 0.5%, QE stock, as expected
- Serbia holds rates, sees inflation in target end-2014
- ECB still ready to use QE, sees uneven recovery
- Peru maintains rate but will ease further if necessary
- BOJ maintains policy stance, exports show weakness
- Gambia raises rate 200 bps, dalasi fall to boost inflation
TABLE WITH LAST WEEK'S MONETARY POLICY DECISIONS:
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This week (Week 33) seven central banks will decide on monetary policy, comprising the countries and jurisdictions of Armenia, Georgia, Mozambique, South Korea, Indonesia, Uganda and Sri Lanka.
TABLE WITH THIS WEEK'S MONETARY POLICY DECISIONS:
|COUNTRY||MSCI||DATE||CURRENT RATE||1 YEAR AGO|