A Global View: Five Central Bank Decisions Serve as Warnings!

This past week we heard from a slew of key central banks on monetary policy. And when it was all said and done, we got important information on what to expect from the markets and economies going forward.

First, it was another surprise rate hike out of China. Its fifth in seven months. The concern: Runaway prices could spark social instability sending the world’s darling, rising economy into chaos.

Alternatively, China’s trying to mop up all of the money it flooded into its economy to achieve double-digit growth when the rest of the world was slumping. And the likely result is a slowdown in China that will produce far weaker growth than the world is banking on for global recovery.

My read: Outlook highly uncertain.

Next, it was the Reserve Bank of Australia. They held the line for the sixth straight month, following last year’s rate hiking campaign. The concern: The impact from December’s floods will hit growth and inflation readings coming down the pike.

My read: Outlook uncertain.

Then it was the Bank of Japan. In response to the crisis in Japan and “strong downward pressure on the economy,” the BOJ has already promised to pump another 5 trillion yen into the economy. And it will keep stimulating and taking whatever supportive actions are necessary.

My read: Outlook highly uncertain.

On Thursday, it was The Bank of England …

Although inflation is running high in the UK, the Bank of England held the line on its historic low interest rates and QE program. The policymakers’ line of reasoning: When you strip out the impact of a new increase in the Value Added Tax (VAT) and the challenges ahead given the other tough austerity measures the government has imposed in attempt to curtail the worse budget deficit among major economies, by next year inflation will be very weak.

My read: Outlook uncertain.

But the big decision on rates came when …

All Eyes Shifted to the
17-Nation Euro Zone

Of course, Europe is in the midst of a widening debt crisis and desperate fight to save the European Monetary Union from potential collapse. And Portugal just became the third country in the euro zone to admit it needs a lifeline to avoid default. That’s why the euro-zone economy is projected to be among the weakest performing major economies this year.

Moreover, Germany, the backbone and core of economic strength in the euro zone and the country with the deepest bailout pockets, has a huge export-driven economy. And the confluence of global economic shocks in recent months will almost certainly take a toll on the global demand for its exports.

My read: Outlook highly uncertain.

Nonetheless on Thursday, as expected, the European Central Bank (ECB) became the first central bank in the developed world to begin rate hikes — it started moving away from ultra-accommodative monetary policy.

But why would they make such a move given the economic climate?

When it comes to interest rates, a systemically threatening political, economic and solvency crisis among their own countries doesn’t matter to the ECB. Nor does the spreading social unrest and government overthrows in the Middle East and North Africa. Neither does a record earthquake, an unimaginably destructive Tsunami and an open ended nuclear disaster in the third largest economy in the world!

What does matter to the ECB is inflation …

When inflation goes above their comfort zone of 2 percent, the ECB mechanically responds with rate hikes. They did that in 2008 in the face of an unraveling global financial system, even while the euro-zone economy was entering recession! That move triggered a 22 percent collapse in the euro.

This time, they could end up triggering the crisis they’ve been so desperately trying to deny: The spread of insolvency to Spain, the most dangerous of the PIGS (Portugal, Ireland, Greece and Spain, the troubled euro-zone members). The rate hike talk of recent months has already floated all government borrowing rates in Europe higher, including Spain.

Now a hike in the benchmark lending rate in Europe means consumer loans and mortgages in Spain just ticked higher. With an unemployment rate of over 20 percent and roughly 90 percent of all mortgages at a variable rate, perhaps this is why last month Moody’s downgraded Spain’s sovereign debt and 30 of the country’s banks.

With Greece, Ireland and now Portugal under the thumb of their European neighbors, consider Spain on the clock. So far Europe has been good at keeping the balls in the air. But how long can that last?

Regards,

Bryan