By Paul Hannon
A growing number of the world’s central banks are poised to join the U.S. Federal Reserve in lifting interest rates in coming months amid solid global growth, though those plans could be scrambled by rising trade tensions between the major economies.
Between its first postcrisis rate rise at the end of 2015, and its fifth in December 2017, the Fed ploughed a largely lonely furrow. But in the first quarter of this year, it was joined by six other central banks in tightening policy, and that number rose to seven in the March through June period.
A similar number of central banks are set to follow its lead in the three months through September, although for some the path is less certain than for others. A marked slowdown in growth could upset such plans, but that remains an increasing risk rather than a likely prospect.
The Fed raised short-term U.S. rates twice in the first half of the year and officials have penciled in two more increases this year. They are widely expected to make their next move in September. The Bank of Canada has already raised its key interest rate in July, and it could well be joined this quarter by the Bank of England, the Reserve Bank of India, and the central banks of Indonesia, Norway and Turkey.
Many of the rate increases this year have partly been a response to the Fed’s moves, which raise the return on U.S. assets and can lead to big outflows of capital from emerging markets if they don’t respond in kind. That would in turn weaken local currencies, and push inflation higher.
Those concerns were a factor in the rate moves by the central banks of India, Indonesia, Mexico, the Philippines and Turkey during the second quarter. Further moves of that kind are likely in coming quarters.
“The impact of rising interest rates in advanced economies, in particular the United States, on emerging Asia requires careful attention,” the Organization for Economic Cooperation and Development warned Friday . “Although the risk is benign at this point, the potential that it can trigger substantial capital outflows cannot be set aside.”
Other central banks are set to follow the Fed’s path, rather than react to it. Economists think it’s likely, but not certain, that the Bank of England will raise its key interest rate for a second time since November when policy makers meet on Aug. 2, seeking to tame an inflation rate that has been above its 2% target.
Norway’s central bank has signaled it is likely to raise its key rate for the first time since May 2011 when its policy makers meet in September.
Elsewhere, caution remains the watchword. Rate rises by the Bank of Japan and the European Central Bank are a distant prospect, although the latter plans to start winding down its bond-buying program in October. Economic growth has picked up in Japan and the eurozone, but it remains modest and uncertain, while inflation has yet to settle around central bank targets.
The main exception among central banking’s heavyweights is likely to be the People’s Bank of China, which is expected to ease policy in response to the threat of an economic slowdown posed by U.S. tariffs.
“The PBOC will soon decide to act more aggressively, including by cutting benchmark lending rates, in order to prevent the economy from slowing too sharply,” said Julian Evans-Pritchard, senior China economist at Capital Economics.
Whether the PBOC or the Fed sets the tone for global central banking in 2019 could depend on the course of the trade conflict.
President Donald Trump’s new tariffs on imports from the European Union, Mexico, Canada and China, the retaliation they provoked and the threats of additional trade curbs have created new uncertainty about the outlook for a global economic expansion that finally returned to its pre-crisis pace in 2017.
The International Monetary Fund said earlier this month the global economy is on course to expand a robust 3.9% this year and next. That is unchanged from its April forecasts, and would represent the best back-to-back years of growth since 2010 and 2011.
It noted, however, the major risk posed by the escalating trade conflicts.
While economists and investors estimate the direct impact on growth of the latest trade measures will be modest, the big worry is that they may mark the start of a fundamental change in the rules of engagement between countries that have framed the global economy over recent decades.
“The coming six months will be extremely telling for central banks,” said Anatoli Annenkov, an economist at Societe Generale who has worked for both the European Central Bank and Sweden’s Riksbank. “I think clearly the central banks are worried.”
–Lingling Wei in Beijing contributed to this article.
(END) Dow Jones Newswires
July 19, 2018 13:56 ET (17:56 GMT)
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