Developing Markets Central Banks to ease policy

There is flexibility for central banks of the developed markets to ease under the heightened risks scenario and this move is under process. The expected changes will give proper insurance under the moderate growth disappointments. However, the sign of a tail risk that disturbs global growth will give rise to challenges for central banks that face the zero bound and a threat that inflation expectations might decline.

The ECB, after seeing the renewed downside threats to inflation, hinted its intention of easing policy during its meeting in March. Inflation is likely to stay below zero through the mid of 2016, while the European Central Bank forecasts are now expected to indicate inflation below the target rate through 2018.

"We expect a 10bp cut in the deposit rate to -0.4%, a €10bn increase in the monthly pace of QE purchases, a 3- month extension of the QE program to June 2017, and two additional TLTROs", says JP Morgan. 

Meanwhile, the neighbouring banks will be pressurised with ECB's action. The Riksbank is likely to lower rates in February, while the Norges Bank is expected to follow in March. The Bank of England is likely to keep rates unchanged until late 2016. The US Fed is unlikely to undertake measures this week.

"With no action expected for the Fed, the post-meeting statement will take center stage. We do not expect changes in the forward guidance, which already is noncommittal", says JP Morgan.

The US Fed officials are expected to acknowledge the recent slowdown in growth and emphasise the downside threats to inflation. Meanwhile, the Bank of Japan is also unlikely to take measures this week, even if there is a strong case for easing. The country's economic growth has been rough and inflation is much below the central bank's forecast rate. Furthermore, the yen is up 12% since mid-2015.

"We now expect the BoJ to ease in April by increasing the pace of purchase of JGBs, equity-linked ETFs, and J-REITs", says JP Morgan.