Central Banks

Super Wednesday for World's Central Banks


The Bank of Japan welcomes anew anti-deflation governor this week, the Bank of England mightget a new pro-growth mandate and the Federal Reserve is likelyto stick like glue to its aggressive bond-buying program.

Together, the three events speak volumes about the balanceof risks in a global economy that is on the mend but still along way from rude health.

Unemployment is intolerably high in the United States andmost of Europe, while growth in many countries is well below itspre-crisis trend. As a result, inflation is firmly subdued.

Add to that the inability of many heavily indebted countriesto cope with higher borrowing costs, and it is no wonder thatcentral banks will do whatever is needed to keep a lid on bondyields, said Joachim Fels, chief international economist atMorgan Stanley in London.

"Despite the uptick in growth that we see, we don't thinkcentral banks are done easing yet," Fels said. "The fears thatwe get an early exit from quantitative easing and negative realinterest rate policies are unfounded, at least for this year."

Supportive monetary policy is a big reason why Fels expectsthe global economy to emerge from the twilight as 2013 unfolds.

"We're still talking about sub-trend GDP growth this quarterand next. But in the second half of this year, we think we willmove into daylight," he said.

The BoJ Becomes Relevant Again

For once, the Bank of Japan will be an important driver ofthis global reflation if Haruhiko Kuroda, who takes over at thehelm of the central bank on Wednesday, makes good on his pledgeto stop Japan's long deflationary rot.

Other central banks will feel the need to remainexpansionary if their currencies rise due to yen weaknesstriggered by bold BOJ easing, Fels said.

Even the European Central Bank could come under a bit ofpressure to do more, added Daniel McCormack, a strategist withMacquarie in London.

"Even though expectations are high for some prettyaggressive action from the BOJ, when it does happen and you canhold and see it and it's real, the market will still reactpositively," he said.

Regime change of sorts is also in the air at the Bank ofEngland.

Chancellor of the Exchequer George Osborne, Britain'sfinance minister, is expected to announce a review of the BoE'sinflation-focused remit, or possibly outright changes to it,when he presents his annual budget on Wednesday.

(Read More: Bank of England Faces Knife-Edge Decision on Bond Buys)

With little room to change taxes or spending because of hisdetermination to stick to austerity, Osborne might give moreroom for the central bank to loosen monetary policy further.

That would smooth the path for the arrival of Mark Carney,the current Bank of Canada chief, who takes over from MervynKing as BOE governor in July. Indeed, McCormack suspects Osborneand Carney have struck a deal on the course of action to take.

"When Carney comes on board you can kind of expect somerazzle dazzle in terms of monetary policy," he said. "His legacywill be judged by whether he turns the UK economy around in hisfive-year tenure. So he's going to give it everything he's got."

With the United States, China and possibly Germany gainingeconomic momentum, and central banks pushing the acceleratorfirmly to the floor, equity markets should be in a sweet spotfor the rest of the year, McCormack added.

No Change at the Fed

Minutes from the Bank of England's March meeting, also dueon Wednesday, will show whether the bank is inching closer toeasing even before Carney takes over. Three of its nine-memberpolicy-making panel, including King, had already voted foradditional bond-buying stimulus in February.

Rounding out Central Bank Wednesday is the Federal Reserve,which looks set to end a two-day policy meeting by agreeing tokeep buying $85 billion a month in mortgage and Treasury bondsin an effort to encourage investment and bolster confidence inthe economic recovery.

(Read More: Fed's Fisher: Too-Big-to-Fail Banks Are 'Crony' Capitalists)

The policy is broadly working. The economy has shown suchresilience in the face of higher taxes, gasoline prices andprospective federal spending cuts that some banks have marked uptheir forecasts for GDP growth this quarter by a full percentagepoint to an annual pace of 2.5 percent or more.

Figures this week on housing starts, building permits andexisting home sales are likely to confirm housing as animportant driver of the recovery.

Indeed, the Fed is likely to present a brighter outlook forboth growth and unemployment in updated forecasts to be releasedwith the outcome of the Fed's policy deliberations.

Ward McCarthy, chief financial economist with Jefferies inNew York, said he expected Fed Chairman Ben Bernanke to reflectthe more optimistic tone when he briefs the media.

"But I don't think he will be sufficiently upbeat that hewill be suggesting in any way that the Fed is going to alter itspolicy intentions any time soon," McCarthy said.

In addition to the U.S. housing figures, preliminary pollsof purchasing managers from China and the euro zone top theweek's data slate alongside the monthly sentiment survey byGermany's IFO economic research institute.

According to a Reuters poll of economists, the index derivedfrom the euro zone survey is likely to have edged up this monthfrom 47.9 to 48.2, still below the 50 threshold denotingexpansion.

Uncertainty cast by Italy's deadlocked elections and theunprecedented decision by euro zone finance ministers onSaturday to tax bank depositors in Cyprus to help pay for abailout are among the many threats to still-fragile confidencein the single currency.

But Morgan Stanley's Fels believes Europe, too, willeventually emerge from the twilight zone. "We think therecession will die of old age at some stage this year," he said.