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7 Nov 2008

Financial Markets

Downward Interest Cycle Underscoring Global Gloom (Current Issue No.2114)

Global downside risks to growth have become increasingly evident over the past few months. Lately, the International Monetary Fund (IMF) slashed their economic growth projections for economies worldwide due to a deepening and lingering global recession roiled by financial downturns around the globe. The global economic setback which may even plunge into a severe recession, especially in the US, Europe and Japan, or even in the Asian economies such as China, has been a major cause for several central banks to shift to an easing monetary policy implemented through interest rate reductions or halts in upward interest rate cycles.
Gloomier economic growth worldwide has compelled policymakers around the globe to prioritize economic stimuli and financial institution bail-out plans for troubled financial institutions (through credit guarantees and purchases of distressed assets or recapitalizations). At the same time, global central banks have had to adopt an expansionary monetary policy to compliment government stimuli.
KASIKORN RESEARCH CENTER (KResearch) holds the view that several leading central banks may continue to slash their policy rates, while some may adopt a more aggressive stance in their rate cuts in response to the economic difficulties in their countries. Moribund economic growth may lead to massive layoffs which would eventually hurt private spending. Fortunately, the recent corrections in global commodity markets, especially in oil prices, have prompted continuously milder inflationary pressure that in turns provides greater leeway for central banks worldwide to pursue more accommodative monetary policy in the future. We may see downward cycles in policy rates touching multi-decade lows, coming to less than 1.00 percent in many countries, or reaching nearly zero percent for several quarters ahead to sustain economic growth through tough times amid a much worse than expected global economic recession.

Even so, the economic stimuli that come with easing benchmark interest rates may help soften the economic jolt only to a degree. Significant slowdowns in the world's major economies, including but not limited to the US, Eurozone and other European countries, Japan and many Asian countries, will continue to prompt investors, especially in the emerging bourses, to remain risk-averse. Volatile financial markets around the globe may hence continue to support the US Dollar as a safe-haven currency. On the other hand, on the short-list of US President-elect Mr. Barak Obama's economic team contenders, there are said to be Messrs. Timothy Geithner, Lawrence Summers and Paul Volcker, who are all very well-versed in economic and financial matters, and would likely receive a good response from financial markets upon the appointment of any of these experts. Even so, attention should be paid to more economic stimuli – possibly worth USD190 billion – proposed by President-elect Mr. Obama. If decisive actions are taken by the White House and are supported by the US Congress with appropriate timing, confidence toward the recovery in the US economy and its financial sector may be restored, which will help strengthen the US Dollar further.

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