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Central bankers bid to stimulate growth

This article is part of
Investing in Asia – February 2016

Central bankers bid to stimulate growth

The decisions of central bankers in the US, UK, Europe and Japan are well documented, with most having pursued accommodative monetary policy following the financial crisis.

But while investors tend to hang on to every word of the US Federal Reserve, the Bank of England and the European Central Bank, less attention has been paid to Asian central banks’ ability to move global markets.

That was until last August when Chinese policymakers introduced a ‘one-off’ 1.9 per cent devaluation of the renminbi. Since then all eyes have been on the currency, but the intentions of the People’s Bank of China have confused some.

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“Part of the difficulty with Chinese policymakers has been that both they and the financial markets are still learning how to communicate with each other,” says Ayesha Akbar, portfolio manager at Fidelity Solutions.

“While there is a cottage industry devoted to Fed commentary, there has been comparatively little need for Chinese policymakers to communicate their intentions and policies prior to now. Feeding into this, [China] is transitioning into an economy in which it has less control and in which markets play a more significant role.”

Ms Akbar acknowledges the People’s Bank of China has tried to improve the communication of its policy to markets in recent months, however. China has also been the most aggressive at reducing its deposit rate.

JAPAN’S STIMULUS STRATEGY
On January 29 the Bank of Japan (BoJ) surprised markets when a narrow majority voted in a negative interest rate, with the central bank saying it will “cut the interest rate further into negative territory if judged necessary”. So what impact will the -0.1 per cent interest rate have?

Nick Peters, portfolio manager at Fidelity Solutions:

“The BoJ’s adoption of negative interest rates is likely to be a positive move for the economy, particularly with the care they took to offset the negative impact for banks. What they are essentially trying to do is to flatten the marginal yield curve for the economy, but ensure that the weight of the yield curve which banks are exposed to remains relatively steep. This should boost the economy while limiting the damage to bank profits.”

Peter Sengelmann, senior portfolio manager of emerging market and Asian debt at NN Investment Partners:

“The negative interest rates should result in three main benefits, some of which have already been achieved. First, government bond yields have been pushed down sharply across the curve, which should also help to reduce the premium on risky assets. Second, introducing such a bold policy acts as a signalling effect to show the BoJ’s commitment to price stability. Third, negative interest rates should eventually drive down the yen’s value. Although the currency depreciated initially following the BoJ’s announcement, it has since appreciated as the market began to price out Fed rate hikes.”

Gero Jung, chief economist at Mirabaud Asset Management:

“One clear-cut effect of negative interest rates is the signalling device. By imposing negative interest rates – like the Bank of Japan did in January – a central bank signals to the market that it is willing to go far in order to increase monetary accommodation. In Japan, for instance, recent monetary policy measures have led to a flattening of yields on the middle and long-term maturity spectrum.”