World’s big-3 central banks meet different agendas
The world’s 3 most powerful central banks convene this week, with the US Federal Reserve setting the pace in a retreat from the era of easy money. Three meetings within 36 hours of each other are set to conclude with the Fed raising interest rates, the European Central Bank potentially fleshing out its plan to cease buying bonds, and the Bank of Japan maintaining its massive stimulus programme.
Fed chairman Jerome Powell’s relative hawkishness presents investors with reasons to buy the dollar as central banks for almost half the global economy — and 3-quarters of the official currency reserves — diverge in their monetary policies. It also threatens to intensify pressure on emerging markets, which are already unnerved by the withdrawal of US stimulus and increasingly calling on the Fed to slow down.
“The Fed will likely remain on a trajectory that few other central banks can keep up with even with a time lag,” said Stephen Jen, chief executive officer at hedge fund Eurizon SLJ Capital in London. “Inflation in the US will likely continue to drift higher, forcing the Fed to do what it needs to do.”
While the US central bank is in the lead, the ECB’s pending pivot after more than 3 years of quantitative easing reflects mounting optimism that the world economy remains on track for a solid expansion in 2018 after a wobble in the first quarter shook investors. Economists at JPMorgan Chase & Co estimate developed markets rebounded to grow 2.5 per cent in this quarter from 1.6 per cent in the prior three months.
Such confidence comes despite trade warmongering by US President Donald Trump, the rise of a populist government in Italy, the costliest oil in more than 3 years and palpitations in emerging markets from Turkey to Argentina — factors which all pose a challenge to growth.
The Fed is the most upbeat as it readies to raise rates for the second time in 2018 on Wednesday. Officials could even update their projections to show them leaning further toward four hikes for the year as a whole, up from the three they flagged in March.
With a $1.5 trillion tax cut coming on stream, economists surveyed by Bloomberg predict a 2.8 per cent expansion this year, keeping unemployment around a 20 year low sub-4 per cent and setting up a modest overshoot of the Fed’s 2 per cent inflation target.
In tightening again, the Fed would be declaring that its focus is on managing the domestic economy regardless of fallout elsewhere. Emerging markets are at risk from higher US rates forcing up the dollar and prompting investors to shift money elsewhere.
Turkey and India this week followed Argentina, Indonesia and Mexico in lifting rates to protect their economies, while Brazil again intervened to defend the real. Reserve Bank of India Governor Urjit Patel and Bank Indonesia Governor Perry Warjiyo both called on the Fed to be mindful of its actions.
“The Fed has, by statute, to care about US inflation and US employment,” said Seth Carpenter, chief US economist at UBS Group in New York and a former adviser to the Fed. What happens in financial markets matters insofar as it affects the US economy and that threshold hasn’t been crossed, he said.
At the same time, ECB President Mario Draghi is finally on the cusp of exiting from the institution’s crisis-fighting mode. His chief economist, Peter Praet, signalled that policy makers will hold their first formal discussion on ending their bond-buying program when they meet on Thursday.
While the ECB could still delay a final decision until July, there are reasons to act now. Inflation jumped to its fastest pace in more than a year in May — driven mainly by resurgent energy but with signs of an improvement in underlying prices — and the economic expansion remains intact despite a slowdown from last year’s decade high.
Casting a pall is the emergence of the populist government in Italy, with its promises of hefty spending increases and ambivalence towards euro membership. But the ECB appears unfazed and keen not to be viewed as a prisoner of politics.
The asset-purchase program started in 2015 to reinvigorate the 19-nation economy is scheduled to run at least until September, by when holdings will total €2.6 trillion ($3.1 trillion). Market expectations are that the pace of buying — currently €30 billion a month — will be tapered to zero by the end of this year.
Tightening isn’t on the agenda yet for the BoJ, which turned to asset-purchases years before the Fed and ECB to address entrenched deflationary forces in Japan. Even with the addition of yield-curve control to Governor Haruhiko Kuroda’s tool kit in 2016, the BoJ is still buying vast quantities of Japanese government bonds and its balance sheet is set to soon surpass the value of the nation’s annual economic output.
Since the last BoJ meeting in April, disappointing data has made it clear that Japan is a long way off from its 2 per cent inflation target. The core consumer price index slipped to 0.7 per cent, wage growth fell back to trend and gross domestic product ended the longest expansionary streak in almost three decades.
GDP shrank 0.6 per cent on an annualised basis in the first quarter, according to revised data released on Friday, as a weaker reading of private consumption offset a stronger one for capital investment. That missed the median forecast of economists.
JPMorgan Chase and Bank of America are among those banks which pushed back forecasts for tightening by the BoJ, which begins a 2-day meeting in Tokyo next Thursday. — Bloomberg