Monetary policy matters
By Mark Mobius, Executive Chairman, Templeton Emerging Markets Group
This year we expect the divergence in monetary policy among the world’s central banks to be a key theme and a likely driver of asset flows. For now, the scorecard seems to be tilted toward monetary easing since in the first month of 2015 alone, 14 central banks engaged in some form of monetary policy loosening, generally in the form of interest rate cuts or asset purchases.
Denmark’s central bank has been particularly aggressive in regard to the former, slashing interest rates four times in a three-week period already this year, while the European Central Bank (ECB) announced plans to step up its quantitative easing (QE) game plan, taking a page from the playbook of the US Federal Reserve (Fed) and Bank of Japan.
When it comes to QE, “easing” really isn’t an accurate description—in actuality, it is about expanding rather than easing. The first phase of the Fed’s money-creation program (QE1) started in late 2008 in response to the US sub-prime financial crisis, in the form of a program to purchase government debt, mortgage-based securities and other assets primarily from banks who were suffering from the declining value of those assets. The original program was set at US$600 billion, but the expected economic recovery and ending of tight credit did not materialize as expected. Hence, QE2 was launched in 2010, and then two years later, QE3, as policy makers became more and more desperate to create the required economic stimulus. In total, more than $4trn (close to the size of China’s foreign exchange reserves) was spent, about six times the original plan. The result was a three-fold expansion of the Fed’s balance sheet.
In my view, what’s most important to note is that during those years the United States was not the only country to launch such a program. In the United Kingdom, a £75bn (about $120bn) program was launched in 2009, and that programme was gradually expanded to £375bn (about $600bn). The Bank of England’s balance sheet expanded four-fold; the government was using new money to buy back its own debt. Improving economic conditions in both the United States and United Kingdom have now turned the discussion in those markets toward the timing of a wind down and potential interest rate increases ahead.
As easing decelerates in the United States and United Kingdom, it marches on in other countries. In October 2014, the Bank of Japan expanded its monetary policy efforts, increasing asset purchases to ¥80trn annually ($674bn). Dubbed by some as “quantitative and qualitative easing,” or “QQE,” Japan’s central bank has been battling deflation and attempting to jumpstart years of economic stagnation.