Forty-seven central banks, spearheaded by the U.S. Federal Reserve (the Fed) and the European Central Bank (ECB), have lowered interest rates in response to a shift in risk perception as a result of the rise in global geopolitical risks, the trade war and political uncertainties stemming from Europe. The Central Bank of the Republic of Turkey (CBRT) also joined the club for lower interest rates with a major cut in the benchmark rate, 325 basis points, to 16.5% on Thursday – a decision taken with due consideration of the global trend followed by leading central banks, disinflation in the country and moderate recovery in economic activity.
In global markets, which have undergone many challenges since the beginning of the year, there has been a serious deterioration in risk perception in the face of trade wars concerns, Brexit uncertainty, political developments in Italy and geopolitical risks stemming from Iran and Syria. In this period, central banks were forced to take steps that could be described as a return to the unusual monetary policies implemented after the 2008 global economic crisis.
In addition to the positive outlook in the labor market and growth in the U.S. last year, inflation maintaining around the Fed's target of 2% has strengthened the bank's expectation that the bank will continue to raise interest rates in 2019 and 2020.
Although the ECB was expected to close its asset purchase program by the end of 2018, developments such as the increase in Italy's public debt stock, political uncertainty stemming from Brexit, deterioration in growth and the inflation outlook in the EU prevented the bank from reaching this goal. At this point, the declining risk appetite for developing countries last year increased globally in 2019 and portfolio outflows deepened, while the tendency toward assets and bonds market, considered as a safe haven, has grown.
In response, leading central banks such as the Fed and the ECB returned to expansionary monetary policies to meet the incentives needed by the global economy, saying expansionary policies were needed. Emerging economies also cut interest rates, especially as of July, and followed the footsteps of major central banks.
Fed signals, ECB follows
The Fed, which started this year with the expectation of three interest rate hikes, signaled an interest rate cut as of the second half of the year following the trade policies of President Donald Trump, the slowdown in the global economy and the increase in geopolitical risks.
In July, the Fed, which made a decision in line with expectations and attracted interest rates to the 2.00%-2.25% band, reduced interest rates for the first time in about 11 years. The expectation that the Fed will cut interest rates in September is fully priced in the markets.
In line with market expectations, the ECB also lowered the interest rates of deposits by 10 basis points to minus 0.50% yesterday and announced that the monthly asset purchase program of 20 billion euros would be resumed as of Nov. 1.
Meanwhile, the CBRT started the year with a policy rate of 24% but cut the rate by 425 points in July and 325 basis points in September. Thus, the CBRT, which cut the policy rate by 750 basis points in total, took the lead in this regard.
In January, central banks of five countries, namely Angola, Ghana, Armenia, Georgia and Malawi, cut interest rates. In February, central banks in Azerbaijan, India, Egypt, Jamaica, Paraguay and Kyrgyzstan started to cut interest rates, and by March, Georgia and Nigeria were included.
In April, Ukraine also cut interest rates by 0.50 basis points as a relatively quiet market. May, when the Fed signaled an interest rate cut, was a busy period in terms of central bank decisions. In May, when many countries from Rwanda to New Zealand, from the Philippines to Iceland, from Sri Lanka to Tajikistan cut policy rates, a total of 11 countries took action to cut.
June was a period in which central banks of developing countries such as India, Chile, and Russia cut interest rates, while a total of 16 countries cut interest rates in July. The Fed, Turkey, Brazil, Russia and South Africa also cut interest rates during this period.
While 21 countries cut interest rates in August, interest rate cut action was taken in six central banks including ECB and CBRT as of Sept. 13.
Looking at the actions taken, it is seen that Azerbaijan has applied the most interest rate cuts – five times since the beginning of the year. The total level of action taken by the Central Bank of Azerbaijan, which is on the path of gradual reductions, remained at 150 basis points.