Global interest rates peak as investors eye cuts

18 June, 2019 12:00 AM printer

New York: Global interest rates have peaked.

That’s the conclusion investors are reaching as the Federal Reserve and its counterparts in Japan and the euro area convene for pivotal meetings this week amid signs the world economy is ushering in a new period of easier monetary policy, report agencies.

“We all worry about slow growth,” Tony Crescenzi, market strategist at Pacific Investment Management Co., told Bloomberg Television on Friday. “We would project that interest rates for central banks will stay low for at least the next five years.”

What Pimco has long dubbed the “new normal” is reflected in calculations by JPMorgan Chase & Co. economists. Their measure of the average global interest rate reached a high of 2.82 per cent in early February.

Having once expected it to end the year at 3 per cent, they now see it falling to 2.5 per cent in December, led by cuts from the Fed. Russia, India, Chile and Australia are among those to have already loosened policy.

Behind the reversal are escalating trade wars, skittish financial markets, weakening demand and soggy inflation. Bloomberg economist Dan Hanson’s nowcast shows global growth running at 2.6 per cent in the second quarter, down from 4.7 per cent at the start of 2018. Structural trends such as rising debt and ageing populations will also serve to contain borrowing costs.

The key questions for the central bankers are when they will start cutting and how deeply can they actually go as they again seek to rescue economies with less ammunition than they once had and with governments preoccupied by clashes over trade and lacking the willingness to loosen budgets.

Insight will hopefully come on Wednesday when Fed Chairman Jerome Powell and colleagues conclude their latest round of policy discussions. Investors are primed for them to indicate a willingness to cut the US benchmark in coming months.

There remains division over the outlook. Deutsche Bank AG sees action in July, while JPMorgan is saying September. Goldman Sachs Group Inc. joins Bloomberg Economics and Citigroup Inc. in reckoning the Fed will merely stay steady through 2019.

At least the Fed created room for stimulus by hiking rates in recent years. That’s more than can be said of the European Central Bank and Bank of Japan whose interest rates remain in negative territory.

ECB President Mario Draghi and colleagues gather from June 17 for a conference in the Portuguese town Sintra, while Governor Haruhiko Kuroda and fellow BoJ policymakers meet on Thursday.