New York: Global interest rates have peaked.
That’s the conclusion investors are reaching as the Federal Reserve and its counterparts in Japan and the euro area convene for pivotal meetings this week amid signs the world economy is ushering in a new period of easier monetary policy.
“We all worry about slow growth,” Tony Crescenzi, market strategist at Pacific Investment Management Co., told Bloomberg Television on Friday. “We would project that interest rates for central banks will stay low for at least the next five years.”
What Pimco has long dubbed the “new normal” is reflected in calculations by JPMorgan Chase & Co. economists. Their measure of the average global interest rate reached a high of 2.82 per cent in early February.
Having once expected it to end the year at 3 per cent, they now see it falling to 2.5 per cent in December, led by cuts from the Fed. Russia, India, Chile and Australia are among those to have already loosened policy.
Behind the reversal are escalating trade wars, skittish financial markets, weakening demand and soggy inflation. Bloomberg economist Dan Hanson’s nowcast shows global growth running at 2.6 per cent in the second quarter, down from 4.7 per cent at the start of 2018. Structural trends such as rising debt and ageing populations will also serve to contain borrowing costs.
The key questions for the central bankers are when they will start cutting and how deeply can they actually go as they again seek to rescue economies with less ammunition than they once had and with governments preoccupied by clashes over trade and lacking the willingness to loosen budgets.
Insight will hopefully come on Wednesday when Fed Chairman Jerome Powell and colleagues conclude their latest round of policy discussions. Investors are primed for them to indicate a willingness to cut the US benchmark in coming months.
There remains division over the outlook. Deutsche Bank AG sees action in July, while JPMorgan is saying September. Goldman Sachs Group Inc. joins Bloomberg Economics and Citigroup Inc. in reckoning the Fed will merely stay steady through 2019.
At least the Fed created room for stimulus by hiking rates in recent years. That’s more than can be said of the European Central Bank and Bank of Japan whose interest rates remain in negative territory.
ECB President Mario Draghi and colleagues gather from June 17 for a conference in the Portuguese town Sintra, while Governor Haruhiko Kuroda and fellow BoJ policymakers meet on Thursday with no change expected.
Other central banks meeting next week include those of the UK, Brazil, Indonesia and the Philippines. Interestingly, the Norges Bank may buck the trend by hiking rates on Thursday.
Here’s our weekly rundown of other key economic events:
The eyes are on the Fed amid calls for looser policy amid intensifying trade wars, weakening economic data and President Donald Trump tweeting that it should operate more like the People’s Bank of China. While few expect a rate cut, this month investors will be watching for any shift in wording from “patient” to something like “closely monitoring.” That would leave the Fed more wiggle room for a cut as soon as July, if the outlook deteriorates further. On the topic of deterioration, a run of housing data throughout the week will be worth monitoring. As for trade, Congress begins hearings on tariffs on Monday and US Trade Representative Robert Lighthizer testifies on Tuesday.
Europe, Middle East and Africa
The Sintra gathering may prove a moment of introspection for ECB officials confronting a grim reality of flagging growth, trade tensions, and a limited capacity to respond. A summit on Thursday of politicians may or may not throw light on who will replace Draghi. In the UK, the Bank of England’s decision on Thursday is unlikely to feature a rate hike, but it might yet produce a newsworthy split among policymakers if any vote for such a move, ending a year of unanimity. BoE Governor Mark Carney and Chancellor Philip Hammond will subsequently address a dinner in London. One central bank that may actually hike rates is Norway’s where officials meet on Thursday.
South African President Cyril Ramaphosa may use an address on Thursday to announce details of a rescue package for struggling power utility Eskom, whose blackouts in the first quarter contributed to the nation’s biggest economic contraction in more than a decade. Turkish budget data on Monday will show how much the government spent ahead of next Sunday’s repeat election, while a decline in industrial production on Tuesday could be the first sign of an anticipated economic contraction in the second quarter. Central banks in Morocco, Uganda and Mozambique are all expected to keep rates on hold.
In an exclusive interview with Bloomberg TV on June 10, BoJ Governor Kuroda said he can deliver more monetary stimulus if necessary, but needs to take care with its side effects on the financial system. Don’t expect that on Thursday, although inflation data on Friday will likely show a further slowing if price gauges with a measure excluding food and energy remaining less than half the BoJ’s target. Taiwan is also seen on hold on Friday while Indonesia and the Philippines may ease on Thursday.
Brazil’s central bank is expected to keep its key interest rate at an all-time low of 6.5 per cent on Wednesday, but signal it may cut it in the next few months. That will require tweaking its communication, which currently leaves any additional monetary easing contingent on the approval of a controversial pension system overhaul by Congress. Also on Wednesday, Argentina’s first-quarter gross domestic product data will likely show South America’s second-largest economy contracted for a fifth consecutive quarter, challenging President Mauricio Macri’s re-election plans. On Friday, the Colombian central bank is forecast to hold borrowing costs at 4.25 per cent for a ninth consecutive meeting.