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Why markets are watching global central banks closely these days

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By DK Aggarwal

Markets are closely watching the central banks for clues as to how aggressive they will be in the year ahead. Central banks across the globe are preparing the markets for a gradual withdrawal from accommodative monetary policies, which they had introduced in the system to revive their economies. The Great Recession was highly disruptive for the global economy and its effects are still being felt.

Meanwhile, inflation has started inching up but is still distant from the desired levels of the central banks, even as growth has started picking up, resulting in an environment that continued to support the bulls in stock markets.

However, one cannot deny the fact while global growth has returned, dependence on monetary accommodation has left major structural problems in almost all the major economies.

At its recent meeting, Feds tone was not quite as hawkish as expected but was optimistic on the outlook that it intends to continue raising rates at a gradual pace.

Undoubtedly, the growth story is looking strong with business surveys at decade-plus highs. However, US unemployment is extremely low and is still below target. Going forward, the most important economic data that will be relevant to gauge the next Fed move would be employment and inflation.

The European Central Bank (ECB) is currently looking to exit its €30 billion monthly bond purchase programme. This programme is currently scheduled to last till the end of September 2018. However, the recent fall in inflation is expected to put policy makers in a dilemma about ending the bond-buying programme. The next policy meeting is scheduled to be held on June 14. Also, GDP of euro zone area was down 0.3 percentage points in the three months to March.

The Bank of Japan (BoJ) has repeatedly pushed back the timeframe for its 2 per cent inflation target, which it had first adopted in 2013 after years of deflation. Recently keeping interest rates unchanged, BoJ removed a phrase on the timeframe for achieving its 2 per cent inflation target due to subdued inflation.

Japan's economy is expanding moderately, but inflation remains weak. Moreover, it also said that it is no hurry to reach its elusive price goal as the economy is in good shape. BoJs massive monetary easing programme is cornerstone of Prime Minister Shinzo Abe's Abenomics to spur the growth of the land of rising sun.

Back home, given the sharp and substantive increase in crude oil prices (Brent crude $75 a barrel), it is already putting pressure on the Reserve Bank of India for an early tightening move. Though RBI has lowered its inflation forecasts, however, it still continues to sound cautious on various fronts that pose upside risks to inflation. Surging crude oil prices, risks of slippage in fiscal deficit, rupee weakness and rising bond yields have complicated RBIs policy front.

At its recent meeting, RBI kept interest rates unchanged and at the same time cut its inflation forecast, citing lower food prices. The Indian economy, too, is facing the return of the twin deficits.

In the days to come, the attention of the market participants will certainly be on when and how quickly the central banks will reduce the extra support. The idea of tighter monetary policy may cause some concern among stock investors. However, on the whole, while US remains firm on monetary withdrawal, ECB and BoJ are still on course to providing monetary accommodation for longer period which may cushion the immediate impact on equity markets.

Meanwhile, USs trade negotiations with China are something central bankers across the globe will be watching closely.

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