Settle in, guys. I’m afraid I’ve got some terrible news. Our central banks, those institutions that keep the global economy on a somewhat even keel, are now showing signs that they’re about to throw us all into an apocalypse. Gone are the days when global trends were the main drivers behind price outlooks. Now, it seems domestic drivers are in the driver’s seat, and they have no idea what they’re doing.
Once upon a time, New Zealand led the way with its innovative approach to inflation targeting back in the early ’90s, and it looks like they’re about to break ranks again. With whispers of interest rate hikes as early as the end of February, the Land of the Long White Cloud could be signaling the end of monetary policy uniformity as we know it.
Diverging Paths
Across the globe, the story is much the same, with each central bank facing its unique set of challenges. The United States is wrestling with stubborn inflation and a labor market that’s surprisingly robust, leading traders to second-guess the Federal Reserve’s stance on easing up anytime soon. Meanwhile, the euro area, having narrowly dodged a recession, is seeing price pressures ease more quickly than anticipated, prompting calls for earlier rate cuts.
The Swiss are betting on interest rate cuts next month, and the UK is stuck between a rock and a hard place with both a sputtering economy and high inflation. The International Monetary Fund (IMF) isn’t painting a rosy picture either, with its forecasts pointing to a diverging global economy: a brighter outlook for the US, gloomier for the euro zone, and downright dismal for the UK.
As if to add salt to the wound, JPMorgan strategists are advising clients to hedge their bets by favoring US equities and the dollar, given the stark growth divide between the US and Europe. Down under, the Reserve Bank of Australia (RBA) and its Canadian counterpart are expected to maintain a more hawkish stance compared to their global peers.
The plot thickens in Japan, an economy long haunted by deflation, which is now poised for its first interest rate hike since 2007. Fast forward a year, and traders are betting on lower benchmark rates in the US and Europe but a different story in Australia and Japan.
A Tangled Web
The central banks are walking a tightrope, trying to balance the risks of acting too hastily against the dangers of waiting too long. The European Central Bank (ECB) is particularly wary of making a U-turn that could signal they’ve underestimated inflation once again. This is not made any easier by the shifting drivers of inflation, with services and wages now playing a more significant role than manufacturing.
In New Zealand, unexpected jumps in underlying inflation, despite a slowdown in tradable prices, have caught policymakers off guard. This scenario demonstrates a broader trend towards more localized, idiosyncratic monetary policies, moving away from the coordinated approach we’ve seen in recent years.
The IMF’s recent updates offer a glimmer of hope, projecting a slight uptick in global growth for 2024, thanks in part to easing inflation and advancements in artificial intelligence (AI). However, the agency’s chief economist, Pierre-Olivier Gourinchas, cautions against complacency, citing ongoing geopolitical tensions and the potential for disruptions to global trade.
The World Economic Forum’s Chief Economists Outlook echoes this sentiment, with a majority expecting global economic conditions to either weaken or remain unchanged over the next year. Despite some positive developments, the outlook is marred by continued financial tightness, geopolitical rifts, and the looming threat of geoeconomic fragmentation.
The central banks’ next moves could either steer us towards stable growth or plunge us into economic turmoil. With so much at stake, the world watches and waits, hoping for the former but bracing for the latter.
