Caution is the watchword for world’s top central banks

Bloomberg

Central banks enter the new year under pressure from investors to rethink just how aggressive they can be hiking interest rates.
A slowdown in the world economy, the trade war and skittish financial markets are forcing policy makers including Federal Reserve Chairman Jerome Powell to express fresh caution about their scope for tightening monetary policy. The People’s Bank of China is also pledging support for its economy.
That outlook marks a change from last year where a majority of central banks raised rates and the European Central Bank ceased buying assets. Of course, if economies weather the latest challenges, policy makers may need to rethink anew.
“Heightened uncertainty about the trajectory for policy normalisation and reduced divergence between the Fed and the rest are set to characterise the 2019 central bank outlook,” said economist Tom Orlik.
The Fed spooked markets at the end of 2018 with a projection for two rate hikes in 2019, based on a more optimistic outlook for the economy than investors held. Policy makers pointed to forecasts continued strong growth and jobs gains, while investors fretted over slowing global growth and the ongoing trade war between the US and China. Contributing to the unease, Bloomberg reported on December 21 that President Donald Trump had discussed the possibility of firing Fed Chairman Powell out of frustration over the Fed’s gradual tightening campaign.
Powell has since dialed back his message, assuring markets he would be flexible and patient. Many Fed watchers now believe US policy makers are unlikely to raise rates before June unless data surprises to the upside.
The euro area reached a turning point for monetary stimulus when the ECB capped quantitative easing at the end of 2018. A slowing economy and sub-target inflation means the central bank will stay supportive. It intends to keep interest rates at record lows at least through the summer of this year.
Economists predict a hike late in the year, though investors don’t expect one until 2020. Much will depend on how the 19-nation economy copes with risks from protectionism and volatility in emerging and financial markets. Mario Draghi’s term expires in October, meaning he may leave without raising rates as president. Jockeying for his job has already started, with a decision by governments likely after European Parliament elections in May.
The Bank of Japan faces a huge test in 2019 as inflation falls further below its 2 percent target, exposing the limits of its massive monetary stimulus program. Some economists see a risk of the core consumer price index falling below zero as cheaper energy and mobile-phone charges undermine BOJ policies. January’s flash crash in the currency market, which brought a sharp and unwelcome strengthening in the yen, underscores how much is beyond the central bank’s control.
Mark Carney is starting his final full year as Bank of England governor before he leaves in January 2020. He can expect the central bank’s outlook to continue to be dominated by Brexit, especially after the UK formally leaves the European Union on March 29.
As the deadline nears and the chance of a chaotic exit rises, investors have bet there’ll be no rate increases in the next 12 months, though economists foresee at least one being squeezed in. Carney has warned that a no-deal Brexit could drive up inflation that requires higher borrowing costs. If the government can get a deal signed in time, the market outlook could quickly be rewritten.
The Bank of Canada is sticking to its view that more interest rates increases will be needed on top of five hikes over the past two years, but there seems to be a lot less urgency than there was a few months ago.