Major central banks likely to turn up policy heat

BENGALURU: Expectations are firming for major central banks to turn further away from ultra-easy monetary policy despite scant evidence of a pickup in inflation, Reuters polls of more than 500 economists showed yesterday.

One striking conclusion from surveys covering more than 40 economies is the rift opening between what most top central banks target – inflation – and policy bias, prompting many economists to warn about the rising danger of policy error.

“It is one of the most striking economic puzzles of our times: why, when unemployment rates are near historic lows in so many parts of the western world, is wage growth so sluggish and inflation so subdued,” noted Janet Henry, global chief economist at HSBC.

“So the overall message is that central banks will need to remain cautious about the pace at which they withdraw monetary support.”

The latest Reuters polls also underscore ongoing optimism about the world economy’s momentum, with analysts particularly upbeat on Europe, as well as the economies of India and China which together have nearly 40 per cent of the world’s population.

Indeed, a majority of almost 150 economists who answered an additional question said it is more likely that the global economy will do better than worse over the coming year.

This coincides with still rather bullish opinions on how world stock markets are likely to perform in coming months, evident in a recent separate Reuters poll.

But a significant minority still see predominantly negative economic risks, even after more than a decade of monetary stimulus and asset purchases from major central banks amounting to some US$15 trillion.

Reuters polls reveal no change to growth forecasts or at best a slight upgrade for 26 of the 45 economies compared with previous months. Global growth forecasts, collected separately, have been rising gradually since late last year, with the latest pegging 2017 at 3.5 per cent followed by 3.6 per cent in 2018.

But inflation expectations are slightly weaker compared with the last poll, with downgrades to more than half of the economies polled.

At the same time, nearly half the central banks surveyed are expected to either ease back on current stimulus or tighten policy.

In the meantime, confidence in the ability of the US administration to implement promised sweeping tax cuts and to achieve above 3 per cent growth has clearly faded.

Federal Reserve Chair Janet Yellen recently said this would be “quite challenging” to achieve.

Several Reuters polls conducted since the start of the year have been clear the chances of that happening were low.

Yet in September, the Fed is expected to announce the course of action it will take to unwind its more than US$4 trillion bonds portfolio and will raise rates for the third time this year in the final three months.

Those expectations come as US policymakers are split on the outlook for inflation and how the lack of it might affect the future pace of interest rate hikes and policy.

“If everything was on course, if the inflation data was still picking up and the economy was growing well above 2 per cent, then I could understand them (the Fed) going on to more of a pre-set course,” said Ethan Harris, head of global economics at Bank of America Merrill Lynch.

“But in the last few months, we have seen the Fed’s message on the economy becoming increasingly stale and the case for setting in motion this almost fixed path has weakened substantially.”

September may also be when the European Central Bank announces a shift away from its ultra-easy policy based on improving economic growth in Europe, even though the inflation outlook there too remains benign.

“They (the ECB) are facing the same problem that so many other central banks are, namely, a cyclical upswing in growth without any inflationary pressure. The challenge for the ECB is also how to move towards tapering without creating a taper tantrum,” said Carsten Brzeski, chief economist at ING. — Reuters