Daily Management Review

Moody’s expects a respite in monetary tightening


03/01/2019


The rate of normalization of monetary policy will slow in 2019, and central banks will become more cautious in their actions against the background of a more moderate economic growth, according to a recent review by Moody’s. The agency's forecast states that the growth of the global economy, significantly weakened in the fourth quarter of 2018, will continue to slow down in 2019–2020.



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After last year's 3.2%, the growth of the economies of the G20 countries will slow to 2.9% in 2019 and to 2.8% in 2020, Moody’s analysts forecast. Moreover, if GDP growth will gradually approach its potential in developed countries, then emerging markets will continue to weaken: China will have the lowest growth in several decades, while Turkey and Argentina will remain in recession.

Among the key risks for the global economy, Moody’s lists the possibility of a more dramatic than expected slowdown in Chinese growth, a further escalation of tensions between China and the United States, and the resumption of tightening the financial conditions for markets.
Although US President Donald Trump has postponed the increase in tariffs on imports of Chinese goods, the disagreements of the two countries over intellectual property, technology and investment are likely to continue, the agency said. At the same time, analysts call the possibility of increasing US tariffs on imports of automobiles and parts from China as the main risk for the basic scenario of the global economy. Additional pessimism in financial markets may result from a negative outcome of the Brexit talks, as well as increased geopolitical tensions in the Middle East, South and East Asia.

Analysts expect the US Federal Reserve to raise the key rate only once or twice in 2019 (instead of three or four, as previously predicted), and the ECB will start raising rates no earlier than 2020. There is also a small chance that the Central Bank of Japan will slightly tighten monetary policy this or next year, since inflation in this country will remain low.

As global growth slows down, financial regulators in both developed and developing countries will either suspend monetary tightening, or even begin to ease it, Moody’s believes. In 2018, the Fed successfully managed to “tighten the screws” both in the US and around the world. Since December, however, the tone of the regulator has become noticeably more peaceful, analysts say. At the same time, they believe it is likely that increased volatility in financial markets and tightened financial conditions by adjusting the value of securities, especially if the growth of leading economies (China, the eurozone and the US) continues to slow down. The ECB, which completed the acquisition of new assets in December 2018, is likely to keep them at the current level of € 4.7 trillion, as well as interest rates until the first half of 2020.

Moody’s expects that a pause in US monetary policy will ease the pressure on the central banks of other countries.
In addition to Argentina and Turkey, Russia, Chile, Indonesia, Mexico, the Philippines and South Africa also raised their stakes in 2018 — the regulators' task was to stabilize national currencies in the face of declining inflows to developing countries. The respite will allow some of these countries to bring monetary policy closer to domestic economic conditions.

source: moodys.com






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