What Stock Slump? Central Bankers Eyeing Tighter Monetary Policy

(Bloomberg) -- Global central bankers are focusing on tightening monetary policy rather than pacifying nervous financial markets.

That was the message for investors this week from the Federal Reserve, European Central Bank and Bank of England. Officials in the Philippines and India also sent hawkish signals.

As Jerome Powell prepares to speak at length on monetary policy next week for the first time since becoming Fed chairman, here are some of the highlights of what happened in the world economy this week:

Fed Eyeing March Hike

In the minutes of a meeting that took place in January before stocks slid, U.S. central bankers signaled an expansion enjoying “substantial underlying economic momentum” could sustain additional increases in interest rates this year.

That reinforced speculation of a hike in March and fanned talk policy makers could end up raising more than the three times they have penciled in now.

“With a strong labor market and likely only temporary softness in inflation, I view it as appropriate that monetary policy should continue to be gradually normalized,” Vice Chairman Randal Quarles said.

Officials also sought to clear up what they meant by the word "further,” but provided little fresh insight into why inflation is so low.

Around the World

Bank of England officials led by Governor Mark Carney gave investors more reason to expect a rate increase in May, despite data showing the economy is being pinched by Brexit.

At the European Central Bank, officials continued to lay the ground for a shift in policy language by the summer, although that process is still likely to be gradual.

Elsewhere, Governor Nestor Espenilla told Bloomberg that interest rate adjustments remain on the table in the Philippines, while markets are betting Indian policy makers may act too. Polish hawks also said it’s too early to rule out a rate increase this year.

Meantime, Singapore’s government may have given the central bank a green light to charge ahead with monetary policy tightening this year as it delivered its latest budget.

Still, inflation unexpectedly slowed in Sweden, adding to doubts the Riksbank will be able to start unwinding stimulus this year. Brazil’s central bank is also weighing the risks of slower-than-expected inflation and global volatility as it mulls whether to extend its aggressive easing cycle, central bank chief Ilan Goldfajn said in an interview.

What Stock Slump?

The talk of tightening comes just weeks since a rout in stock markets led some to suggest central banks would have to hold back reversing stimulus.

Not so, say the policy makers.

“Wall Street overreacts to everything,” Fed Bank of Minneapolis President Neel Kashkari told Bloomberg Television. “We can’t make policy based on market blips up and down.”

And the BOE’s Carney said the recent uptick in volatility “does not concern me in terms of the path of policy.’’

Investors are still jittery about the outlook though and may look to Powell next week for signs of how tolerant he is of falling equities.

ECB Headaches

Latvia is responsible for just 0.2 percent of the ECB’s economy, yet played an outsized role in the mind of President Mario Draghi this week.

Its central bank chief, Ilmars Rimsevics, was detained on bribery allegations he denies. As if that wasn’t enough, a moratorium on payments was imposed at the ECB’s request on ABLV Bank, a lender accused by U.S. authorities of links to North Korea.

Perhaps a more pressing concern for Draghi are signs his economy has hit a speed bump. At least Draghi is about to get a new deputy in the shape of Spaniard Luis de Guindos.

PBOC Guessing Game

Bloomberg News reported that President Xi Jinping will convene a Communist Party meeting within days to select China’s next government, including monetary and financial regulators, according to people familiar with the matter.

With current People’s Bank of China Governor Zhou Xiaochuan expected to retire soon and a restructuring of the financial oversight system as yet unfinished, Xi now has an opportunity to install his favored candidates, potentially transforming the leadership of the central bank, as well as banking and insurance regulators.

While current bank regulator chief Guo Shuqing and Hubei provincial party chief Jiang Chaoliang have both been tipped for that post, Xi’s top economic policy adviser and Politburo member Liu He has recently been named by analysts in connection with the top monetary policy job and a vice’s premier’s post.

Weekend Reads

• Dodging Infectious Dutch Disease Slams Economic Theory in Norway
• Inflation Looks Poised to Bounce Back Big Time: Eco Research Wrap
• Weak Dollar Could Bring Extra 3 Percent Boost to Trade Growth
• As Food Trade Ballooned Under Nafta, So Did Mexican Waistlines
• The Rise of Amazon, Facebook May be Bad News For Economies
• Kenya Lost IMF Credit in June. Someone Tell the Central Bank

To contact Bloomberg News staff for this story: Craig Torres in Washington at ctorres3@bloomberg.net, Christopher Condon in Washington at ccondon4@bloomberg.net, Anooja Debnath in London at adebnath@bloomberg.net, Carolynn Look in Frankfurt at clook4@bloomberg.net, Clarissa Batino in Manila at cbatino@bloomberg.net, Michelle Jamrisko in Singapore at mjamrisko@bloomberg.net, Matthew Boesler in New York at mboesler1@bloomberg.net, Yinan Zhao in Beijing at yzhao300@bloomberg.net.

To contact the editors responsible for this story: Simon Kennedy at skennedy4@bloomberg.net, Malcolm Scott at mscott23@bloomberg.net.

©2018 Bloomberg L.P.

With assistance from Craig Torres, Christopher Condon, Anooja Debnath, Carolynn Look, Clarissa Batino, Michelle Jamrisko, Matthew Boesler, Yinan Zhao