From the latest Morgan Stanley global monetary analyst, something to watch this weekend:
A fiscal response to economic weakness in the US and the euro area may be desirable but is unavailable, at least in the short run. The burden of propping up markets and the economy for the next few months thus falls on central banks. The negative feedback loop between weak growth and soggy asset markets makes a coordinated monetary policy easing move more likely – perhaps as early as the G7 meeting this weekend. The Fed, the ECB, the BoJ and the BoE could all participate in a coordinated move with a mix of rate cuts and quantitative easing. Strategic complementarity – the willingness and ability to ease if others are doing the same – makes it easier for banks to act jointly rather than unilaterally. Such strategic complementarity also exists for EM central banks. The recent pre- emptive (and perhaps prescient) rate cuts by the central banks of Turkey and Brazil make monetary easing by other EM central banks less surprising and thus that much easier to implement. However, the interaction between DM and EM central banks is one of ‘strategic substitutability’ – aggressive easing by the former means that the latter can afford to do less when it comes to external demand concerns. But if DM central banks don’t deliver, then EM central banks may find themselves following the trail blazed by Turkish and Brazilian monetary easing.
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