The shift in the direction of global monetary policy in the last six months has been more broad-based across geographies than in any period since 2009, with more than a third of central banks covered in the Bank for International Settlements' (BIS) database having eased policy in the past six months. This is shown in a new index of the geographical dispersion of the direction of global monetary policy constructed by Fitch Ratings economics team and depicted in its latest chart of the month.

While some central banks clearly matter more than others for the global economy, the extent to which changes in the direction of monetary policy are synchronised across countries can have important impact on business and household confidence and global financial market sentiment. At the same time they can reveal the extent to which leading global central banks influence policy choices elsewhere and/or the degree to which economic cycles are synchronised across different geographies.

Fitch has constructed a measure of the geographical dispersion of the direction of monetary policy based on a database of up-to-date policy interest rates of 38 central banks published by the BIS (https://www.bis.org/statistics/cbpol.htm). The index is based on the proportion of central banks in the sample that have tightened versus loosened policy in the last six months.

Data shows a 'diffusion index' of the net balance of central banks tightening policy. An equal proportion of tightening and loosening central banks (or no changes in policy at all) would be reflected in an index value of 50; values above 50 mean that a larger proportion of central banks have tightened than have eased in the last six months and values below 50 mean a greater share have eased (if all central banks are tightening the index would be 100 and if all are easing it would equal zero). The index value does not contain any information about the size of the tightening or easing (in terms of basis points) and weights each central bank equally - it simply reflects the net balance of policy direction.

The diffusion index shows a very pronounced shift in the balance of policy direction across geographies in the last six months. The diffusion index has fallen to 34 in July 2019 from a value of 75 as recently as December 2018. More than a third of the central banks in the BIS database have eased in the past six months. Turkey, in particular, has cut aggressively, slashing rates by 4.25p.p. in one policy meeting. Only Norway and the Czech Republic are bucking the trend by tightening policy in the past three months. This contrasts with last December when 52% of the 38 central banks were in a tightening phase and only 3% were easing.

Deterioration in global growth prospects, rising uncertainty about the future direction and impact of trade policy and a slump in global manufacturing and trade have all contributed to this very widespread shift in central bank policy direction. However, relatively muted movements in global inflation trends over the last 12-18 months also hint at the outsized influence of Fed and ECB decisions on the direction of global monetary policy outside the US and eurozone.

In particular, the widespread tightening bias seen in late 2018 occurred despite slowing commodity prices at that time. Moreover, the recent shift to widespread policy easing has not been accompanied by any collapse in commodity prices, in contrast to similar broad-based easing episodes in 2009 and 2015. And the deterioration in global macroeconomic conditions in recent months has not been anywhere near as severe as that seen in 2009.

This apparent disconnect could be consistent with a profound global impact from the Fed's steps to normalise policy through 2017 and 2018, steps which were then reversed following the Fed's 'pivot' back towards easing in early 2019. The ECB's recent signals that they will also shortly be resuming easing - after announcing an end to asset purchases last December - could also have had a strong impact on global policy settings.