Crisis-weary global central banks brace for turmoil

Bloomberg

Just when central bankers thought they were about to get out of the business of emergency economic stimulus, jittery financial markets are threatening to pull some of them back in.
For the European Central Bank, the latest threat requiring vigilance is political turmoil in Italy that’s reviving memories of the debt crisis that threatened to fracture the euro area. The Bank of England’s path is complicated by Brexit and, across emerging markets, central banks are trying to push back against the strong dollar.
The People’s Bank of China recently eased liquidity conditions for banks, while Indonesia’s central bank is forecast to hike rates at an extraordinary policy meeting on Wednesday.
The Federal Reserve is a bit of an outlier — it’s already well along its plans to normalise rates in the US and investors still see a hike in mid-June as a virtual certainty.
But beyond that meeting, the market turbulence from Italy is clouding the outlook for further Fed rate increases, according to trading in the federal funds futures market.
The problem for policy makers everywhere is the uncertainty about Italy’s prospects may drag on for months until another election is held, possibly in September. That vote, which may be perceived as a referendum on the country’s European future, could even have repercussions for the Fed’s plans to raise rates in the second half of the year.
“September has become the question mark” for the Fed, said Paul Richards, president of Medley Global Advisors, a policy research firm. “Now you’ve got this whole bunch of geopolitical risk. They, and the ECB in October, are going to have to make decisions, right at the time you’re going to have Italian elections. This geopolitical risk is really going to start putting September in question.”
For now, eyes are turning to the ECB as the political struggles in Italy worsen and populist parties begin mobilising for another election campaign. That sent note yields surging to levels not seen since 2012.
Markets stabilized somewhat on Wednesday. Italian bonds rebounded, with the 10-year yield falling as much as 19 basis points. The euro rose 0.6 percent after touching a 10-month low.
The Stoxx Europe 600 Index was down 0.2 percent.
Policy makers shouldn’t get lured into hasty action on Italy because of stress in the markets, according to Angel Gurria, the head of the Organization for Economic Cooperation and Development.
It was only eight weeks ago that International Monetary Fund Managing Director Christine Lagarde stood before an audience in Berlin and said the euro-area recovery “has finally turned into a sustained and broadly shared upswing.”
‘SERIOUS RISK’
Now, Italy is always just a few steps away from the “very serious risk of losing the irreplaceable asset of trust,” its central bank governor, Igna-zio Visco, warned in a speech in Rome.
Meanwhile, outgoing ECB Vice President Vitor Constancio offered a reminder that the bar for any intervention was high, stressing that it must meet “specific conditions” and advising Italian leaders to “carefully” read those rules again. “I doubt they can do a ton,” said Roberto Perli, a partner at Cornerstone Macro LLC in Washington.