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Economy

Competitive central banking

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Smoke from a gas flame wafts across this desertscape near the Khurais oilfield in Saudi Arabia.   © Reuters

TOKYO -- Call it beggar-thy-neighbor central banking. Interest rates around the world are coming down. The monetary authorities of emerging nations as well as those of countries that export a lot of natural resources are doing a lot of the pulling. No end is in sight. The result could be chaos in the global financial markets.

     Lower oil prices are a big factor behind the trend. In commodity exporting countries, central banks have reduced interest rates to stimulate domestic economies, which have started slowing due to the falling prices of their main export products.

     In emerging countries, lower oil prices have eased inflationary pressure, making it easier for central banks to ease official rates.

     The rate-cut trend will likely continue for some time, as there are no signs of oil prices significantly turning up anytime soon.

     The economic impact lower oil prices are having is difficult to gauge, Stephen Poloz, governor of the Bank of Canada, noted in a speech on Tuesday. But lower commodity prices pose a great threat to the Canadian economy, which heavily relies on energy-related exports. The central bank lowered its key rate by 25 basis points to 0.75% in a surprise move on Jan. 21. A little more than one month on, anticipation is growing for another rate cut at a meeting on Wednesday.

     In Australia, another major commodity exporter, the central bank has also made a surprise move, reducing its policy rate by 25 basis points to 2.25%. Sharp declines in the price of iron ore, the country's main export, are casting a shadow over Australia's economic future. Glenn Stevens, governor of the Reserve Bank of Australia, has been openly expressing his preference for a weaker Australian dollar. With the country's jobless rate creeping up, the central bank could go for another rate cut at a policy meeting on Tuesday.

     Among major commodity exporters, Brazil is unique. Because its inflation rate remains high, the country's central bank has been forced to raise interest rates.

     For many emerging countries suffering the consequences of China's and Europe's sluggish economies, lower commodity prices are a welcome relief. As cheaper commodities dampen inflationary pressure, central banks in developing countries now have more room to reduce interest rates.

     "If we can lower the inflation rate to below 5%, the central bank will probably make a move," Indonesian President Joko Widodo said Thursday. The country's central bank on Feb. 17 took 25 basis points off the benchmark rate, which slid to 7.5%. It was the bank's first rate reduction in three years, but the president's comment indicates more cuts may be in store.

     In India, the central bank also made a surprise decision in January, knocking 25 basis points off its key-lending rate, which slipped to 7.75%. Because inflation has been benign, expectations for a follow-up are mounting.

     When a central bank cuts rates, one effect is that the country's currency weakens. Because a cheaper currency makes that country's exports more competitive, its rate cuts negatively impact overseas economies.

     In other words, there is a lot of pressure in a lot of countries for central banks to keep cutting interest rates and, essentially, give a boost to exports.

     Rumors are swirling that Thailand's central bank will lower its policy rate at a meeting on March 11. The Bank of Thailand has kept the rate steady since last March.

     Looking from a broader perspective, this kind of one-downmanship could trigger financial market chaos on a global scale.

     "Monetary easing in emerging economies is a positive development over the short term," said Toru Nishihama, chief economist at the Dai-ichi Life Research Institute. "But it will create a flood of excess liquidity and make financial markets jittery in the face of even a minor shock."

     Including the growing likelihood of interest rate hikes in the U.S., the world today is awash with events that could potentially trigger market shocks. More interest cuts will only increase the risk of global financial turmoil.

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