STOCKHOLM/ISTANBUL (Reuters) - Central banks are ending the year by loosening monetary policy further to try and foster a durable recovery in 2013, denoting a measure of alarm about the health of the world economy.
Sweden, Turkey and Hungary all cut interest rates on Tuesday, united by the theme of the damage inflicted on their economies by euro zone economic weakness.
The success of U.S. budget talks and the twists and turns of the euro zone debt crisis will go a long way to dictating the pace of recovery, while China is likely to stick with its 2012 growth target of 7.5 percent when it charts a course for 2013.
But even if all that plays out without setbacks, policymakers in much of the world expect only a slow grind back with many pitfalls on that path.
Sweden’s central bank cut its main interest rate by a quarter point to 1.0 percent -- its lowest level for more than two years -- and said it would expected to hold it around that level for the next year.
“The weak developments in the euro area are having a clear effect on the Swedish economy,” the Riksbank said in a statement.
Turkey cut its main policy rate for the first time in more than a year as falling inflation gave it room to step up its fight against a sharper-than-expected slowdown, after it was the fastest-growing economy in Europe last year.
Hungary’s central bank dropped interest rates to a two-year low of 5.75 percent, delivering its fifth quarter-point cut in as many months.
Budapest will start 2013 without a financial backstop after credit talks with the International Monetary Fund and the European Union stalled. Politics are a factor in monetary policy too since the four rate-setters appointed by the ruling party’s majority in parliament have consistently outvoted Governor Andras Simor and his two deputies in the past few months.
The biggest fish in the central banking pond are on the same track.
Last week, the Federal Reserve launched a new round of monetary stimulus and tweaked its own rule book by indicating interest rates would remain near zero until U.S. unemployment falls to at least 6.5 percent, a jobless level not seen since 2008.
The European Central Bank left rates at a record low 0.75 percent but by forecasting the euro zone economy could well contract next year as well as this, left the door firmly open for a reduction in borrowing costs early next year.
“We expect domestic weakness to extend into next year with a very gradual recovery in the second half of the year,” ECB President Mario Draghi told European parliamentarians on Monday.
In parts of the world, political pressure on central bankers is a developing theme.
Following a landslide election win for a Liberal Democratic Party demanding stronger measures to beat deflation, the Bank of Japan is expected to ease monetary policy again on Thursday.
After Sunday elections, incoming prime minister Shinzo Abe called on the BOJ to boost its monetary stimulus and pressed it to adopt a 2 percent inflation target, double its current price goal, as soon as next month.
“I think the BOJ will deliver with increased purchases of government debt. Next year could also be a big year for monetary policy easing, because of the inflation target debate and a change in leadership at the BOJ,” said Norio Miyagawa, senior economist at Mizuho Securities Research & Consulting in Tokyo.
India’s central bank kept interest rates on hold on Tuesday, ignoring government pressure to reduce borrowing costs, but said it was shifting its focus towards boosting a flagging economy, raising the odds of a rate cut as early as January.
As with this year, much will rest on the performance of the world’s powerhouse economy; China.
The central bank’s head of research said on Monday that China faced no big risk of an inflation rebound, nor any major pressure to ease monetary policy aggressively next year.
Australia’s economy is heavily reliant on Chinese demand for its raw materials. Its central bank said on Tuesday that it decided to cut interest rates this month rather than wait because it saw further evidence that the peak in the mining investment boom was near.
Writing by Mike Peacock; editing by Anna Willard