Central Banks Governors will meet in Jackson Hole to discuss how to assemble back the economy that was before the financial crisis of 2008. To find ways how to boost the growth and jobs 5 global issues central banks facing at the moment will need to be addressed. What are those major problems?
25 August, AtoZForex – Governors of Central Banks will gather in Jackson Hole, Wyoming, in order to discuss how they can exit the monetary hole induced by the financial crisis of 2008. During the meeting, Janet Yellen and other central bank governors will debate how to assemble the monetary system in a way that it is resemblant to the one that was before the collapse. Furthermore, the participants will discuss the difficulties central banks need to overcome to reach the goal of boosting the growth and jobs. Here are 5 global issues central banks facing that have to be tackled.
1. Low rates
Amid one of the main issue are the low-interest rates. In the summer of 2013, the financial markets went down as the Fed mentioned it would start tightening monetary policy . It showed that due to borrowing heavily in the US currency some of the major economies were still dependent on cheap debt. As a result, if at that moment dollar interest rates increased the countries would be encountered with raising interest bills.
A year ago, the Fed made another attempt to raise interest rates. However, it did not take place as the yuan was depreciated by the Chinese authorities causing a stock market to decline. Hence, Fed managed to increase the rates in December 2015. According to Stanley Fischer, vice chair of the U.S. Fed, another rate hike may occur in September.
2. Negative interest rates: “deepening cut”
Negative interest rates imply that commercial banks need to pay in order to keep their funds on deposit with central banks. The purpose of the policy is to enforce banks to lend money or invest in riskier assets. However, when central banks started to use it, it resulted in the reduction of the gap between lending and borrowing rates hitting profits of banks.
The recent cut rate of the Bank of England is anticipated to hit the earnings of banks as well. So Mark Carney promised to refrain from negative interest rates and he put aside £100bn of cheap loans for the banks in order to keep their profit margins. Also, Haruhiko Kuroda, governor of the bank of Japan,has recently stated that he would not exclude a “deepening cut” to the negative interest rates.
3. Stagnating Eurozone
Another concern of the central bankers is the stagnating Europe. Although there is an expectation that Mario Draghi will release further funds later this year to increase the growth in the eurozone, the governors are concerned that Europe will be on monetary life support for a long time since wealthy European individuals keep their savings rather than spend them. For each euro that is invested in property, the central bank will have to print two in order to support economic growth.
4. Weak emerging markets
Moving further, another issue to discuss is the emerging markets as the global investors are undermined in their assurance that economies recovered from the 2008 crisis. The world has recently observed how quickly strong emerging market economies, e.g. Brazil and Turkey, can turn into the recession. These two countries were boosting in 2013 supporting the global growth. However, as the China started to slow down the Brazilian economy began experiencing the recession as well. Whereas Turkey faced a downturn due to the additional credit costs caused by heavy borrowing in dollars.
5. Currency devaluation
In addition to previously mentioned issues, there is a concern in regards to currency wars. As some of the central banks are determined to depreciate their local currencies to make exports more competitive. Japan is one of them with Haruhiko Kuroda being assigned to reduce the cost of credit and lower yen. Some of other countries are China, Eurozone, and England which viewed the lower value of a pound as a benefit. The main goal for all them is to compete with American companies that benefited from a cheap dollar.
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