GEORGE TCHETVERTAKOV<br /><strong>HEAD OF MARKET RESEARCH, ALPARI UK</strong><br /><br />LOOKING at macroeconomic events over the past few weeks, it is becoming increasingly clear that central banks around the world are considering different monetary policy frameworks going forward. Over the past 18 months, many central banks were forced to follow similar policies of cutting interest rates as quickly as possible due to severe funding constraints and plummeting output.<br /><br />But now that the recovery story is gaining momentum, central banks are reacting by implementing policy measures to suit their respective territory/currency best, assuming demand continues to recover. This was of course expected – removing emergency measures and raising interest rates must occur at some stage – but the timing of these measures was not expected to occur so soon.<br /><br />Last week, the Federal Reserve put forth plans to begin withdrawing quantitative easing measures in October. The Norwegian central bank (Norges Bank) is suggesting that forthcoming interest rate rises will be sharper than expected while Japanese officials are quietly optimistic, saying that government-backed support could be removed in December if current levels of improvement are maintained.<br /><br /><strong>CURRENCY INTERVENTION</strong><br />On the other hand, the Bank of England has recently increased asset purchases (QE) beyond expected limits up to £175bn and the Swiss National Bank continues on a path of currency intervention and bond purchases. Further examples of divergence are likely to appear as data creates more daylight between those that can recover quickly and those that will lag behind. The effect on currency pairs will be more pronounced if individual recoveries are unsynchronised, fractured and localised.<br /><br />Whether you subscribe to the V-shaped recovery theory or not, there is always the question of how economies will recover given that debt levels are likely to be capped from now on as precautionary measures are put in place. In this scenario future growth rates will arguably struggle to match past growth rates because credit will be harder to obtain and forthcoming financial regulation will restrict the riskier, more profitable practices that laid the foundations of the financial crisis. But what will replace these practices that generated a large portion of economic growth? <br /><br /><strong>OLD HABITS</strong><br />Consumers and businesses must spend to create growth, although spending requires more borrowing and therefore more debt. Companies as well as individuals are saving money because of the recent trauma and future uncertainty. Nobody is interested in either taking on debt if job security is low or investing in a new business venture if there is limited profit potential – the economic crisis has not only created substantial losses but will have also restricted the recovery as people provr unwilling to return to old habits.<br /><br />But those same old habits are now needed but to a more measured extent. However, convincing individuals to take risks in an uncertain environment will require more than just low interest rates. Central banks are trying to remove uncertainty and bring back confidence but the key question is how much certainty can one sell in such an uncertain world? Economic reality itself is changing so quickly that policymakers are having trouble carrying out their remits amid a barrage of conflicting indicators. Somewhat strangely, policymakers are convinced that no one could have foreseen such an unprecedented economic crisis and yet they are able to see an unprecedented economic recovery.