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World’s Top Economists Worry About Tools To Fight Economic Downturn

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(Bloomberg) -- Slowly, but surely, central banks around the world are unwinding the easy money they spent a decade injecting into the global economy to fight the fallout from financial crises and recession. 

Already this year, the Federal Reserve raised its key interest rate twice and the European Central Bank declared it would cease buying assets in December. Stung by investors, emerging market central banks such as Turkey and Argentina have tightened monetary policy even more aggressively. 

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Not all are turning more restrictive. The Bank of Japan is maintaining massive stimulus and the People’s Bank of China is still leaning toward loose policy.

What policy makers do next in 2018 is sure to be a driver for financial markets, long supported by the flood of cheap cash.

Central Bank Rate Changes© Bloomberg Central Bank Rate Changes

Bloomberg Economics took a look at 22 of the top central banks, which together set policy almost 90 percent of the world economy. We outline what they’ve done so far this year and attempt to analyze what they will do next.

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U.S. Federal Reserve

Current federal funds rate (lower bound): 1.75%Forecast for end of 2018: 2.25%Forecast for end of 2019: 2.75%

The Fed is gradually raising interest rates to keep inflation under wraps, following a decline in unemployment to the lowest levels since 2000. Chairman Jerome Powell and his colleagues have hiked twice so far this year and signaled two more increases in 2018. They have also stressed tolerance for a modest overshoot of their 2 percent inflation target, after touching the goal for the first time in six years.

A big question for policy-makers is whether tax cuts and federal spending increases will overheat the economy, fanning inflation or asset prices, which already look lofty in some sectors. Balanced against those concerns are the benefits of very low unemployment, which is drawing more people into the labor force and giving workers a raise after years of stagnant wages. Powell has made plain that they’ll be guided by the data.

What Our Economists Say: “The Fed appears to be leaning more firmly toward a fourth rate hike in 2018, based on the tone expressed at the latest meeting. However, market participants are expressing doubts. The fed funds implied probability of a rate increase at the December meeting remains below 60 percent. To be sure, it makes little sense for policy makers to be talking down rate increase expectations in a quarter where GDP growth could top 4 percent. The subsequent moderation of growth in 2H and evolution of financial conditions will ultimately determine whether the Fed follows through on their latest guidance, and this decision will not need to be finalized until well into the second half of the year. Bloomberg Economics continues to project only three rate increases in 2018.” —Carl Riccadonna

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European Central Bank

Current deposit rate: -0.40%Forecast for end of 2018: -0.40%Forecast for end of 2019: -0.15%

The ECB is watching to see if the euro-area economy can bounce back from recent weakness. That’s all the more important now that the institution has decided to retire its bond-buying program at the end of this yea. Escalating trade tensions with the U.S. are topping concerns.

With inflation still short of its goal, those developments will determine how soon the ECB can raise interest rates. Officials say borrowing costs will stay at record lows at least through the summer of next year, and President Mario Draghi — who steps down in October 2019 — has promised to be “patient.” One area to watch is whether policy makers relax the rules on reinvesting their maturing debt holdings to give them more firepower.

What Our Economists Say: “The recovery of the economy, accelerating wage growth and nascent signs of a pick-up in underlying inflation have allowed the ECB to announce an end to its bond buying program and suggest the first interest rate increase will come in September 2019. We suspect it will be a mini-hike of 15 basis points to the deposit rate. That would restore normality to the ECB’s interest rate corridor. A full 25-bp increase to all its rates is likely to follow nine months later or sooner if the economy performs better than expected.” —David Powell

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Bank of Japan

Current policy-rate balance: -0.10%Forecast for end of 2018: -0.10%Forecast for end of 2019: -0.10%

The BOJ is forging on with massive monetary stimulus while its peers chart a course for policy normalization. There’s little prospect of any change soon, given inflation has stalled and remains less than half way to the BOJ’s 2 percent target.

Most economists expect Governor Haruhiko Kuroda to keep his current yield-curve settings in place for the foreseeable future, with the short-term rate locked at -0.1 percent and the 10-year bond yield target at 0 percent. If there is any tweaking, it will most likely be with the 10-year yield. While the BOJ has held onto a guideline of buying around 80 trillion yen of Japanese government bonds a year, the actual level of purchases has dropped well below this since Kuroda's focus switched to yield management in late 2016, making his policies more sustainable.

What Our Economists Say:“The BOJ will be patient, reflecting its confidence that the recent lull in inflation, a 0.7 percent core CPI gain in May — will pass, as a stronger Japanese economy and faster wage growth stoke price pressures. In our view, the BOJ’s next move is most likely to be an incremental boost to its yield-curve targets, possibly around October. The condition for that: core inflation rising to more than 1 percent, and Prime Minister Shinzo Abe making a symbolic declaration of the end of deflation. As such a move would be taken in line with a renewed pickup in inflation in 3Q, real interest rates would be unchanged — implying no pullback in the BOJ’s stimulus.” —Yuki Masujima

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Bank of England

Current bank rate: 0.50%Forecast for end of 2018: 0.75%Forecast for end of 2019: 1.00%

The BOE is managing a puzzling economy that’s growing more slowly than its peers, combined with record-low unemployment and meager wage growth. It’ll be tricky, but Governor Mark Carney and his colleagues reckon a few interest-rate increases will be needed over the next three years to contain inflation.

Hanging over the outlook is Brexit. A disorderly departure from the European Union could quickly put the BOE back in crisis-fighting mode. The biggest issue now is just the uncertainty about the final outcome as the government continues to negotiate both with itself and Brussels. Carney, who steps down next year, says the central bank will be ready for whatever comes.

What Our Economists Say: “Above target inflation, an economy operating with very little spare capacity and a policy rate shy of neutral. There are plenty of reasons for the BOE to lift rates, but it remains in wait-and see mode. Why? It wants to be sure that the growth slowdown in early 2018 was temporary. We expect the central bank to be reassured by the data flow, giving it the green light to lift rates again as soon as August.” —Dan Hanson

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Bank of Canada

Current overnight lending rate: 1.25%Forecast for end of 2018: 1.75%Forecast for end of 2019: 2.38%

Bank of Canada policy makers have been gaining confidence in the resiliency of the current expansion, and this should keep them on an interest rate hiking path that has already produced three increases since the middle of last year. With growth expected to remain above trend, investors expect Governor Stephen Poloz to move three more times by the middle part of next year, staring with another hike at his next rate decision July 11.

Three more increases would bring policy rates back to 2 percent, or zero in real terms once the country’s 2 percent inflation target is factored in. Moving real rates back to zero has become a new yardstick of normalization for Poloz, who claims there is no fundamental reason why borrowing costs should remain in negative territory. But hiking beyond that will require the resolution of a number of lingering uncertainties, including a positive outcome to Nafta negotiations and a steady unwinding of imbalances in the nation’s slowing and pricey housing market.

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People’s Bank of China

Current 1-year best lending rate: 4.35%Forecast for end of 2018: 4.35%Forecast for end of 2019: 4.35%

The People’s Bank of China is leaning toward an easing bias with more cuts of reserve-requirement ratios in the pipeline this year. The policy tweaks come amid a slowing domestic economy that’s complicated by rising trade tensions with the U.S. Still, policy makers won't have too much leeway for adjustments as they’d also need to contain debt growth.

That dilemma has prompted the PBOC to tighten with one hand and loosen with the other. It has pledged to use monetary policy tools comprehensively and increase funding supply to smaller firms to support growth and fend off external shocks. Yet it also refrained from raising borrowing costs in open market operations in June even as the Fed tightens. The central bank’s balancing act may also be complicated by moves in the currency, with June’s slump in the yuan bringing echoes of the 2015 devaluation.

What Our Economists Say: “The balance of concerns for the People’s Bank of China is shifting back toward supporting growth. That’s reflected in recent moves to cut the reserve requirement ratio — providing more funds for lending, and the decision to keep rates on hold following the Fed’s June hike — breaking the past pattern. The PBOC is not about to open the lending floodgates — deleveraging remains a priority. It does appear concerned about recent signs of fading investment, more corporate defaults, and the growing risk of trade war. Expect more targeted support — as the PBOC attempts to combine minimal stimulus with maximal reform.” —Tom Orlik

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Reserve Bank of India

Current repo rate: 6.25%Forecast for end of 2018: 6.50%Forecast for end of 2019: 6.50%

India’s central bank just raised rates for the first time since 2014 and minutes of the meeting show that all members of the rate-setting panel believe the nation’s economic recovery is strong enough to boost inflation. The threat of costlier oil fanning consumer prices and, with the output gap closing, inflation risks are rising.

That lends support to calls the RBI will gradually tighten monetary policy in coming months. The swap markets are pricing in at least two more hikes in the current cycle. Still, some economists see this as a one-and-done increase and expect the central bank to adopt a long pause.

What Our Economists Say:“The Reserve Bank of India signaled its intent to keep inflationary pressures from higher oil in check by raising the policy rate, a first in over four years, at its June review. Banks’ deposit and lending rates are already on an upward trend owing to tight liquidity conditions. In our view, a tight RBI policy now would do more damage to growth than contain inflation. We expect the RBI to return to a long pause ahead as we project inflation and growth to undershoot the central bank forecasts. Temporary liquidity deficit has also led the RBI to start purchases of government bonds, which we expect to be scaled up post August as liquidity deficit turns more durable.” —Abhishek Gupta

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Central Bank of Brazil

Current Selic target rate: 6.50%Forecast for end of 2018: 6.50%Forecast for end of 2019: 8.00%

Pressure is mounting on Brazil’s central bank to raise interest rates, currently at an all-time low of 6.5 percent. While inflation remains below target and the economy has been slow to recover, prices are expected to rise faster after the real weakened more than 10 percent this year and a nationwide trucker strike caused food and fuel shortages.

The strike impact is expected to be temporary, but a persistently weaker currency could increase prices of imported goods. After keeping the Selic unchanged for two consecutive meetings, policy makers backed off from their pledge to keep rates stable in the future.

What Our Economists Say:“Increasing upside risks to consumer prices from accumulated exchange rate depreciation and supply shocks confirm the easing cycle is over and point to a more cautious central bank. But low inflation in the first half and high unemployment and weak economic growth that limit demand driven pressure on consumer prices and the risk of second round effects should be enough for policy makers to maintain low interest rates. Bloomberg Economics expects the central bank of Brazil to maintain interest rates at 6.50 percent until year-end.” —Felipe Hernandez

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Bank of Russia

Current key rate: 7.25%Forecast for end of 2018: 7.25%Forecast for end of 2019: 6.75%

With inflation at record lows, the Bank of Russia had been hoping to wrap up its easing cycle faster than expected this year, giving the sputtering recovery a monetary boost. But the spring has proved stormier than the regulator expected, what with a new round of U.S. Sanctions, the global sell-off in emerging markets and plans for a value-added-tax hike in Russia. All that adds up to more risk that holding inflation near the 4 percent target — and convincing skeptical Russians that the central bank can keep it there — won’t be as easy as expected.

In June, Governor Elvira Nabiullina set bond investors fleeing with the warning that the regulator might not be able to get monetary policy to the “neutral” stance by the end of the year, as originally expected. Instead, markets may have to wait until 2019 to see the key rate, now 7.25 percent, in that 6-7 percent range. New surprises — anything from more Western sanctions on big Russian companies to faster-than-expected rate increases in the U.S. — could yet throw the central bank’s plans off track.

What Our Economists Say: “A shift in the inflation outlook has brought the Bank of Russia's rate-cutting cycle to a sudden stop. Price growth was already set to accelerate from post-Soviet lows, but now the government plans to raise value-added tax which will push inflation above the 4 percent target next year. Even a temporary overshoot could undo progress in anchoring inflation expectations. The central bank will need to hold policy relatively tight with the key rate at 7.25 percent.” —Scott Johnson

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South African Reserve Bank

Current repo average rate: 6.50%Forecast for end of 2018: 6.50%Forecast for end of 2019: 6.50%

The South African Reserve Bank faces the dilemma of a weakening currency’s impact on its inflation outlook and an economy that shrank the most in nine years in the first quarter. While the central bank left its key rate unchanged in May, it has warned since that it may have to tighten policy if the rand’s plunge to the weakest in almost seven months against the dollar pushes up South African inflation.

Raising the benchmark rate could put further pressure on economic growth, and keeping borrowing costs unchanged would reduce the country’s rate differential appeal, extend the rand’s decline and drive up inflation expectations. The central bank targets price growth in a band of 3 percent to 6 percent, but has made it clear it prefers expectations at the mid-point of this range.

What Our Economists Say:“We expect the SARB to remain vigilant of further weakness in the rand pushing inflation toward the ceiling of its 3-6 percent target interval.  A further weakening of the rand could prompt the central bank to lift the policy rate to reduce the second-round effects on prices, as emerging-market peers in Argentina and Turkey have done in recent months. We now view a rate hike as more likely than another cut in the near term. Further out, the influence of higher consumer taxes and fuel levies washes out of inflation in 2Q19, clearing the path for further easing.” —Mark Bohlund

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Banco de Mexico

Current overnight rate: 7.75%Forecast for end of 2018: 7.75%Forecast for end of 2019: 6.63%

Mexico’s central bank is under pressure to extend its monetary tightening cycle as it confronts a number of risks to inflation, including political uncertainty related to the upcoming presidential election, concerns about the future of the North America Free Trade Agreement, and growing emerging-market turbulence.

Worried about a possible pass-through from a weaker currency to inflation, policy makers in June increased the key rate to the highest level in nearly 10 years and pledged to continue with a prudent monetary policy to ensure inflation heads toward the 3 percent target. Consumer prices are currently rising at an annual pace of 4.51 percent.

What Our Economists Say: “Monetary policy interest rates are high and consistent with tight monetary conditions. Lower inflation and weaker economic growth expected in the second half suggest additional tightening would not be necessary, but with inflation still above the target and lingering external and domestic risks, the central bank of Mexico is likely to keep a hawkish bias. Bloomberg Economics expects the central bank to maintain interest rates at 7.75 percent during the rest of the year, but additional interest rate hikes cannot be ruled out and will depend on new information. Policy makers will be particularly sensitive about risks for exchange rate pass-through to inflation and inflation expectations and potential implications from higher U.S. interest rates.” —Felipe Hernandez

a man wearing a suit and tie: Bank Indonesia Governor Perry Warjiyo Interview© Photographer: Dimas Ardian/Bloomberg Bank Indonesia Governor Perry Warjiyo Interview

Bank Indonesia

Current 7-day reverse repo rate: 4.75%Forecast for end of 2018: 5.00%Forecast for end of 2019: 5.13%

Indonesia’s central bank raised interest rates twice in two weeks in May amid a global emerging market selloff that had seen the rupiah under pressure and investors dumping the nation’s stocks and bonds. Governor Perry Warjiyo, who took the reins at Bank Indonesia on May 24, hiking rates at an out-of-cycle meeting less than a week later, has vowed to be “pre-emptive” with monetary policy, raising the prospect of further tightening in a bid to guard the currency amid a stronger dollar and rising U.S. interest rates. 

While inflation is low by Indonesian standards — consumer prices rose 3.2 percent in May — and economic growth is relatively subdued at about 5 percent, Bank Indonesia is now more focused on the currency which has fallen more than 3.5 percent this year. With the ECB joining the Fed in winding back stimulus, Indonesia is bracing for further market volatility. A third rate hike is clearly on the table when Indonesian policy makers meet on June 29.

What Our Economists Say:“Bank Indonesia has shifted its priorities to stability from growth. The central bank raised interest rates by 50 bps in May and signaled more tightening to come. This has improved the interest rate differential with the U.S., increasing the yield appeal of Indonesian government bonds, and has stabilized the rupiah. Headline and core inflation are low and growth remains below potential. This would normally argue for steady interest rates this year — especially as the central bank has been keen to boost lending. Bank Indonesia’s primary objective is currency stability. Alongside this goal, the central bank uses an inflation-targeting framework to set monetary policy.” Tamara Henderson

Central Bank of Turkey

Current 1-week repo rate: 17.75%Forecast for end of 2018: 17.75%Forecast for end of 2019: 15.00%

Turkey’s consumer inflation is seen accelerating in the second half of this year to as much as three times the official target of 5 percent, putting more pressure on the central bank to act.

The biggest challenge facing the bank will be to overcome Recep Tayyip Erdogan’s distaste for higher interest rates which the freshly reelected president thinks are boosting price gains — contrary to what most economists believe. Non-financial companies’ heavy debt burden leaves them vulnerable to sharp spikes in the lira which lost nearly two-thirds of its value in the last five years as the central bank has failed to act quickly at times of stress.

What Our Economists Say:“The central bank of Turkey is caught between President Erdogan and financial markets. The president has been vocally opposing high interest rates and his resistance will only intensify as economic growth slows down and he gains more power after the elections on June 24. Policy is tight, with borrowing costs up about 9.5 percentage points since the start of 2017. Still, the bank will probably keep rates on hold unless the currency nosedives again.” —Ziad Daoud

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Central Bank of Nigeria

Current central bank rate: 14.00%Forecast for end of 2018: 12.50%Forecast for end of 2019: 12.50%

The Central Bank of Nigeria has kept its key rate at a record high since July 2016 to help curb inflation and support the naira. Even with price growth at the slowest in more than two years, cutting is not a given.

The recent approval of a 9.1 trillion naira budget for 2018 and elections scheduled for February raise the risk that inflation will pick up again in the second half of the year due to increased spending by the government. That could tie the hand of the Monetary Policy Committee for longer, even as easing would help boost growth in the economy that contracted in 2016.

What Our Economists Say: “A reconfiguration of the monetary policy committee in late 2017 and early 2018 has increased the sway of Governor Godwin Emefiele over monetary policy. We now expect the central bank to keep the policy rate on hold at a record 14 percent in 2H18.  Nigeria’s inflation rate dropped from a high of close to 20 percent in early 2017 to around 11.6 percent in May but the CBN expects it to be subject to upward pressure in the second half of the year thanks to fiscal stimulus. The naira’s peg against the U.S. dollar is likely to remain in the place beyond the 2019 elections.” —Mark Bohlund

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Bank of Korea

Current base rate: 1.50%Forecast for end of 2018: 1.75%Forecast for end of 2019: 2.00%

The Bank of Korea began its rate-hike cycle in November, with a single increase in benchmark borrowing costs from a record low 1.25 percent. While Governor Lee Ju-yeol has indicated that the direction from here is up, he and the policy board have been on hold since then.

Record household debt and an economy that’s set to grow 3 percent this year suggest higher rates are in order. Then there’s the widening gap between Korean and U.S. rates. If it leads to capital outflows — that hasn’t been the case so far — the BOK would need to respond. So far, though, tepid jobs growth and a little softening in exports data have weighed on the side of caution.

What Our Economists Say: “With inflation subdued and risks to growth increasing, the path for future rate hikes from the Bank of Korea is likely to remain gradual and shallow. The central bank at its May meeting suggested a view tilting toward dovishness, with softness in the labor market among its concerns. It may not be able to keep policy accommodative for too long though — financial stability is a concern given high household debt and a widening interest rate differential between South Korea and the U.S. Our base case is for the BOK to raise its policy rate once this year.” —Justin Jimenez

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Reserve Bank of Australia

Current cash rate target: 1.50%Forecast for end of 2018: 1.50%Forecast for end of 2019: 2.00%

Central bank chief Philip Lowe has kept interest rates unchanged at a record-low 1.5 percent since taking the helm in 2016; at the time, he signaled financial stability concerns from soaring Sydney property prices outweighed tepid inflation and that he was disinclined to ease further. Fast-forward to today and housing is cooling, while Lowe is blowing on the glowing embers of investment and hiring to spark a tighter labor market in order to fuel wage growth and inflation.

Money markets, meanwhile, have been pushing back bets on a rate increase as quarter after quarter of stagnant real wages and sluggish consumer prices makes it look less realistic. Business confidence is strong, but consumer sentiment is less so as households grapple with record-high debt from a mortgage binge. A turnaround could come quickly; or it could be an even more prolonged period of low wages, weak inflation and steady rates.

What Our Economists Say:“Australia’s growth is on track to pickup and slightly exceed potential this year and next. Even so, obstacles to tightening monetary policy remain. The strongest employment growth in more than 35 years has done little to lift wages. What’s more, heavily-indebted households are vulnerable to higher borrowing costs, and balance sheets continue to deteriorate from an already high level of leverage. The climate for investment, a key driver of the expansion this year and next, has become more challenging. Plans for capital expenditure in the private sector suggest headwinds, instead of tailwinds for growth through mid-2019. We think the RBA will leave the cash rate target unchanged at an all-time low of 1.5 percent through 2018 and most, if not all, of 2019.” —Tamara Henderson

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Saudi Arabian Monetary Authority

Current repo rate: 2.50%Forecast for end of 2018: 3.00%Forecast for end of 2019: 3.75%

Saudi Arabia’s currency peg to the dollar means its interest rate decisions tend to track the Fed. The Saudi Arabian Monetary Authority has increased its key rate by 50 basis points this year to minimize pressure on the peg, despite the kingdom’s fragile economic recovery.

The challenge for SAMA comes from the interbank market, where Saudi borrowing rates have sometimes struggled to keep up with their dollar counterparts, raising the risk of capital flight. SAMA has moved to relieve those pressures by scaling back deposits at banks and reducing the amounts they park at the central bank through its reverse repo facility. It must keep a close eye on domestic liquidity conditions and the interbank market as policy rates rise further.

What Our Economists Say: “The Saudi Arabian Monetary Authority doesn’t have major decisions to make. The currency peg to the dollar means that interest rates are tied to the Fed. They’ve already risen by 50 basis points this year and should increase by an additional 25 bps. SAMA only needs to finetune domestic liquidity conditions to ensure that Saudi interbank rates are keeping up with their dollar counterparts. That was a concern earlier this year, but SAMA appeared to have drained enough liquidity out of the system to avert the risk of capital flight.” —Ziad Daoud

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Central Bank of Argentina

Current 7-day repo reference rate: 40.00%Forecast for end of 2018: 33.00%Forecast for end of 2019: 22.50%

Argentina’s central bank raised its benchmark rate to 40 percent early in May to support the currency amid an emerging-market rout. It indicated monetary policy will remain tight until there are “tangible signs” that inflation is easing. The aggressive monetary tightening — totaling 1,275 basis points after three surprise moves in just one week — has been insufficient to stem the peso’s decline, even after the government announced talks with the International Monetary Fund for a record $50 billion credit line.

Under intense market pressure, the head of the central bank resigned on June 15 and was replaced by Luis Caputo, previously the country's finance minister. His challenge is to bring inflation down to 17 percent by the end of next year, as agreed with the IMF. Partly due to the recent currency slump, inflation is forecast to end 2018 at more than 27 percent.

What Our Economists Say:“Amid tighter external financing conditions and weaker confidence in the government’s economic adjustment plan, Argentina’s large current account and fiscal deficits imply it will need to keep high interest rates to continue attracting capital. High interest rates are also necessary to rein on high inflation and inflation expectations and start rebuilding the credibility of the central bank. Bloomberg Economics expects the central bank to maintain the seven-day repo reference rate at 40 percent and slowly reduce it later in the year with timing and magnitude contingent on progress in the new adjustment plan and external financing conditions.” Felipe Hernandez

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Swiss National Bank

Current Libor target rate: -0.75%Forecast for end of 2018: -0.75%Forecast for end of 2019: -0.50%

Since shocking the world in January 2015, the Swiss National Bank has kept policy on hold, sticking with the lowest interest rates of any major central bank and a pledge to intervene in currency markets if necessary. Now, President Thomas Jordan has his eyes trained on Frankfurt and Rome: Trade wars, a North Korea standoff or political turmoil in Italy could send investors back to the safety of the franc, reviving memories of the European sovereign debt crisis, when the SNB waged heavy interventions.

With rate-setters in Frankfurt pledging to keep borrowing costs at rock bottom through next summer, the SNB is very likely to stick with its current policy for the foreseeable future, so as not to exacerbate pressure on the currency. Jordan and his colleagues have also grown more dovish on medium-term inflation, meaning they have ample space to keep policy accommodative.

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Sveriges Riksbank

Current repo rate: -0.50%Forecast for end of 2018: -0.40%Forecast for end of 2019: 0.20%

Swedish policy makers meet in early July to decide whether their forecast for a rate increase “toward the end of the year” still holds. The bank will need to factor in a cooling domestic expansion led by a housing downturn, a brewing trade war and the dovish ECB, which Governor Stefan Ingves likes to refer to as the “elephant.”

Some on the executive board are itching to lift rates that have been below zero for more than three years. One member has already voted to tighten, while another says October is a viable option. Inflation has been holding around the 2 percent target since early 2017, growth remains healthy and a recent selloff in the krona is offering a way out of negative rates. But with so much invested in stabilizing inflation over the past four years, it’s certain that any move higher will be a very cautious affair in Stockholm.

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Norges Bank

Current deposit rate: 0.50%Forecast for end of 2018: 0.75%Forecast for end of 2019: 1.25%

The oil-rich Norwegians could be among of the first to start raising rates in the second half of the year. The country’s oil industry is revving up again, unemployment has slid before 4 percent and the economy is nearing capacity. Buoyed by an accelerating economic recovery, Governor Oystein Olsen at the end of June said he was now prepared to raise rates in September for the first time in seven years.

The governor can afford to take his eye off the krone, which he paid close attention to and was keen to keep weak after Norway was hit by a crash in oil prices in 2014. The bank enters the second half of 2018 with a new and more flexible approach to inflation targeting, a lower mark to aim at of 2 percent and an increased focus on financial stability. House prices are once again rising and debt growth is running ahead of incomes, which means that he will probably ignore that inflation is well below the target.

Reserve Bank of New Zealand

Current cash rate: 1.75%Forecast for end of 2018: 1.75%Forecast for end of 2019: 2.25%

Governor Adrian Orr is overseeing the biggest shakeup at the central bank since it pioneered inflation targeting three decades ago. Orr has already ushered in the new government’s policy for a Fed-style dual mandate of employment and price stability. Now he must prepare the bank for a new decision-making structure from January that includes external experts on the policy committee and the publication of minutes.

Changes in policy itself aren’t on the immediate horizon as inflation continues to track below the RBNZ’s 2 percent target. Orr has said he won’t raise rates from a record low until he sees clear signs of broad price pressure. The bank’s own forecasts show the benchmark on hold until the third quarter of 2019.

What Our Economists Say:“The Reserve Bank of New Zealand has signaled higher interest rates next year, though these plans may change. Inflation is at the lower end of the 1-3 percent target range and the economy is slowing. Growth faces sustained headwinds from household spending due to a clampdown by the new government on immigration. What's more, business confidence has soured. Investment faces hurdles from rising external risks and higher funding costs. This year the central bank has a new governor and a new mandate, which has been broadened to include full employment, in addition to inflation. Decision-making by committee is also on the horizon, instead of policy-setting by the governor alone.” —Tamara Henderson

(An earlier version of this story displayed a faulty version of the initial map)

--With assistance from Onur Ant, Theophilos Argitis, Catherine Bosley, Walter Brandimarte, Matthew Brockett, Alister Bull, Samuel Dodge, Julius Domoney, Michael Heath, Harumi Ichikura, Cynthia Li, Brett Miller, Chris Miller, Lin Noueihed, Karlis Salna, Catarina Saraiva, Piotr Skolimowski, Karthikeyan Sundaram, Brian Swint, Olga Tanas, Rene Vollgraaff, Sarina Yoo, James Mayger, Sveinung Sleire, Amanda Billner, Jonas Bergman and Adrian Leung.

To contact the editor responsible for this story: Simon Kennedy at skennedy4@bloomberg.net, Andre TartarZoe Schneeweiss

©2018 Bloomberg L.P.


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