Inflation Weakness Pushes Central Bankers Closer to Reversal
(Bloomberg) -- Central banks from the U.S. to Asia are turning dovish as they increasingly fret about getting inflation to pick up in a bruised global economy.
Fed Chairman Jerome Powell effectively extended the U.S. central bank’s pause on interest-rate increases on Wednesday, even opening the possibility that the next move could be a cut. On Thursday, central banks in Indonesia and the Philippines -- among the most aggressive rate hikers last year -- kept policy on hold, as did the Swiss National Bank.
Global growth is under pressure after a sharp slowdown in 2018, and policy makers are waiting for clarity on issues from trade tariffs to Brexit. But inflation in particular is dominating concerns, with little sign that the post-crisis recovery, extreme monetary stimulus and a decline in unemployment is driving up price pressures.
Powell was “sounding optimistic on the economic outlook, but pricing power is not that much in evidence in the U.S. economy,” said Paul Donovan, chief economist at UBS. “Thus the inflation imperative to raise rates quickly is not there in the view of the Fed.”
That idea was also in evidence at the SNB, which cut its inflation forecasts, but left its prediction for Swiss economic growth unchanged. The European Central Bank, which now plans to keep rates on hold at least for the rest of this year, said Thursday that underlying inflation is “muted.”
“The normalization of monetary policy has been pushed further into the future,” said SNB President Thomas Jordan. “For the foreseeable future we’ll have have low rates internationally.”
In Asia, the U.S. policy shift may have opened the door for rate cuts as inflation remains subdued and economic growth slows. That’s a stark contrast from last year, when the prospect of further Fed hikes was pummeling the region’s currencies and pressuring current account deficits.
"The Fed’s big shift will end the tightening wave for Asia’s central banks and open the door for future easing," said Hak Bin Chua, an economist at Maybank Kim Eng Research Pte in Singapore.
Elsewhere on Thursday, Taiwan’s central bank kept its benchmark rate at 1.375 percent, citing mild economic growth and a stable inflation outlook. The Bank of England also stood pat in a decision announced in London.
While the BOE is hemmed in by Brexit, even some of its most hawkish members have signaled a change in tone on inflation and policy tightening. Michael Saunders said this month that economic growth is “probably not strong enough to create excess demand and inflation.”
Caution is dominating the thinking among central bankers, who are mindful of the “do no harm” mantra.
But there are signs that the global economy is near the trough of the slowdown, and some are predicting a stronger second half to 2019. At UBS, a global model puts annualized growth this quarter at 2.8 percent, up from 2.2 percent at the end of 2018. It says there are “more convincing signs of data improvement.”
The Fed’s initial dovish shift was sparked by market turmoil and a drop in equities at the end of 2018. For some, the economic worries are overdone and Powell has gone too far.
“I don’t think the shift we’ve seen is justified by the deteriorating economy,” said Patrick Armstrong, chief investment officer at Plurimi Wealth. “The policy mistake everyone was worried about in December was a too-hawkish Fed. We may have gone the other way, a too-dovish Fed that’s supporting markets rather than looking at the economy.”
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