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All Eyes On Central Banks

All Eyes On Central Banks

Policies by central banks across the world to kick-start the economy haven’t borne fruit as yet, writes Chris Tedder, research analyst at FOREX.com

Yet, despite all of the aforementioned attempts to kick-start the global economy, many problems and challenges lie ahead for central banks throughout the world. The market, in particular, is going to be paying very close attention the latest round of promises/stimulus from the ECB/Fed.

The question everyone is asking about the US economy is; will QE3 be able successful in meaningfully reducing unemployment? Looking back at QE1 and 2 one could draw the conclusion that they didn’t do what they were designed to do. However, on the other side of the question many analysts believe that the US job market would be in a worse position now than without the implementation of the first two rounds of QE. The answer lies somewhere in the middle – they were somewhat effective but not as effective as the Fed hoped they would be. There is a chance QE3 will be more successful than its predecessors as it is aimed more towards buying mortgage backed securities which are at the crux of the problem in the US, the housing market. In any event, we think the US economy will recover; it may just take a little longer than the market expects.

In Europe, we expect to see relatively weak growth figures for the foreseeable future. Nonetheless, the ECB has been instrumental in staving off an economic collapse in Europe, and will continue to play a key role in bringing Europe back from the brink, especially through the use of its outright monetary transactions program (OMT). Under this program the ECB has said it will buy unlimited amount of government bonds once the nation(s) in question apply for a bailout from the regions rescue funds. This basically means the ECB has agreed to become lender of last resort, which is great news for struggling sovereigns and the market.

The PBoC hasn’t taken as much drastic action recently as the Fed and the ECB, largely because its problems aren’t as severe. However, the PBoC has been very active in China’s financial markets in an attempt to increase liquidity. To do this the central bank conducts open market operations (OMO), usually by selling reverse repos to major banks. However, the bank is somewhat limited in what it can do. The PBoC has to keep a close eye on inflation and house prices to ensure they don’t get too high, which would potentially be very detrimental to the Chinese economy. However, we think the PBoC has both the will and the tools to prevent a hard landing in China.

Overall, central banks throughout the world are attempting to stimulate healthy economic growth. Whilst some of the operations conducted by the ECB, Fed and PBoC have failed thus far to spur global growth, they have gone a long way to calming investor sentiment and preventing a collapse of the global economy.

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