Vijay Kumar Gaba

The Bank of Canada (BoC) has added some more fuel to the debate over the efficacy of monetary tightening in maintaining inflation-growth equilibrium under the current economic conditions. BoC hiked its key policy rate by 50bps to 3.75% on Wednesday, instead of the expected 75bps. BoC explained its decision to slow the pace of policy tightening in light of growing worries about a deeper global economic downturn. In the post policy statements, BoC said, “Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding”.

Many observers are reading the change in stance of BoC as a template that may be followed by other central bankers also, especially the US Fed. It is pertinent to recall that two members of the Monetary Policy Committee (MPC) of RBI had also expressed similar views in the last meeting of the Committee. Obviously this development adds more interest to the next week’s (1-2 November) FOMC meeting and RBI’s reaction to the latest stance of US Fed.

In my view, BoC’s latest policy stance may not particularly influence other central bankers; but we may see more and more central bankers pursuing an independent monetary policy, congruent with the local conditions rather than towing the line of the US Fed. Notably, the Bank of Japan (BoJ) and the People’s Bank of China (PBoC) have refrained from tightening in the recent past.

‘If’ we see more divergence in the monetary policies stance of major central bankers across the world, one of the collateral could be material rise in volatility in the currency markets; which have already been volatile for the past two years. This higher probability of rise in currency volatility brings gold and cryptocurrencies to the centre of investment and trading strategies.

In this context the following are noteworthy:

·         Bloomberg has recently reported that “large volumes of metal are being drawn out of vaults in financial centers like New York and heading east to meet demand in Shanghai’s gold market or Istanbul’s Grand Bazaar.”

New York and London vaults have reported an exodus of more than 527 tons of gold since the end of April, according to data from the CME Group and the London Bullion Market Association. At the same time, gold imports into China hit a four-year high in August.

The Reserve Bank of India has been a big buyer in 2022. Its total gold reserves now stand at 782.7 tons, ranking it as the ninth-largest gold-holding country in the world. The Reserve Bank of India has purchased over 200 tons of gold in the past five years.

·         Earlier this week, the House of Commons in the U.K. voted in favor of recognizing crypto assets as regulated financial instruments and products in the country. The new PM of UK, Rishi Sunak is widely seen as pro-crypto by the market participants.

Couple of weeks ago, The US based bank J. P. Morgan announced cryptocurrencies as their “preferred alternative asset class in replacement of real estate”. Many other large banks like Goldman Sachs and US Bancorp have also increased their engagement with cryptoes materially in the recent past.