Should Central Banks Have Coordinated Stimulus Moves?

In the space of 30 days, five major central banks round the world took turns to deliver aggressive stimulus measures in a bid to counter a deteriorating economic outlook and boost domestic growth.

United States Federal Reserve
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United States Federal Reserve

While financial assets such as stocks have reacted positively to the moves, one analyst suggests that the central banks could have made a bigger impact if they had coordinated their actions and announced measures on the same day.

“The response to all of these fragmented actions has been lukewarm,” Kathy Lien, managing director of BK Asset Management in New York said Wednesday. “If all (the) central banks eased on the exact same day, it would have sent a more powerful message to the market but right now, investors still see policymakers in reactionary mode.”

The European Central Bankfired the first salvo on Sept. 6, when President Mario Draghi unveiled plans to buy bondsof debt-burdened euro zone nations in order to cut their borrowing costs. The U.S. Federal Reserve followed a week later with its own easing measures, promising to buy $40 billion of mortgage-backed securities every month indefinitely, until the employment picture improves significantly.

Asian central banks sprang into action soon after. In mid-September, the Bank of Japan expanded its asset-buying program by $126 billion. A week later, the People’s Bank of China pumped a record weekly cash injection of $58 billion into money markets. And on Tuesday, Australia’s central bank surprised many market watchers by lowering its cash rate by 25 basis points to 3.25 percent.

The measures may have caused an initial euphoria in stock markets, with U.S. shares rallying 4.4 percent at its September peak following the ECB announcement, and European and Asian equities rising 6.3 percent and 7.3 percent, respectively. But they struggled to keep the gains. As of Tuesday, U.S. had shaved those gains to 2.65 percent, Europe to 2.1 percent and Asia 5.4 percent.

According to Lien, a joint action by the global central banks would have been much more impactful, at least from an equities perspective.

“(If) the goal of these central banks is to drive up the price of stocks, bonds, housing and other assets, it is too early to say whether they failed or succeeded. The problem is that stocks have not been able to push beyond its initial rally in the beginning of September,” she wrote in a note.

Other analysts argue that such coordinated action is not needed at this point because markets haven’t reached “crisis” mode.

“Coordinated action is useful at times of intense crisis, like in 2008 and 2009 when financial markets seized up,” Shane Oliver, head of investment strategy and chief economist of AMP Capital Investors said. “I’m just not convinced that it’s not necessary at the moment.”

There’s also the question of timing. Different economies have different set of problems and varying schedules to resolve them.

“I think central banks are not feeling same degree of urgency. They are primarily focused on domestic issues and every country has different problems,” Oliver added.

However, this does not preclude the possibility of some coordinated action in the months to come, BK Asset’s Lien said, especially if “financial markets weaken enough to warrant coordinated action.”

She adds that “un-coordinated” action is better than no action at all.

“(We) have to recognize that if not for the recent efforts by central banks, currencies and equities would probably be trading much lower than where they are right now,” Lien said. “The one thing central banks have been successful at is containing volatility.”

BOE, ECB Meet Amid Spain Rumble

Central bank watchers will turn their attention to Europe this week, with monetary decisions expected from the Bank of England and European Central Bank on Thursday.

While both central banks are expected to hold off from further changes in monetary policy, Spain remains front and center on their radar. A media report emerged on Tuesday that Prime Minister Mariano Rajoy has denied that his country will request a bailout from this weekend, further confounding investors struggling to make sense of a raft of contradictory messages about when Spain will formally seek aid.

Lien believes time is running out for Spain and the country will “cave” in the next 20 days. Until that happens, global markets will remain on relative tenterhooks.

“There is a general sense of nervousness in the market and the tension is so thick you can cut it with a knife, because, there's still no news out of Spain,” she said.

By CNBC’s Jean Chua