Low on Fire Power Monetary policy returned to easing mode last year in response to a marked slowdown in global growth. The IMF estimates that the monetary easing added around 0.5% to world growth in 2019. The policy loosening was extensive, with a total of 71 rate cuts by 49 central banks according to the IMF, in what proved the most synchronised easing of monetary policy since the global financial crisis over a decade ago. The IMF believes that without this action by central banks, we would now be looking at a global recession, but this has been avoided.
Following the broad based slowdown in global growth last year, the latest data suggest what the IMF calls a “tentative stabilisation” in activity, with signs in particular that the declines in international trade and industrial output may be bottoming out. However, the outlook for the world economy remains challenging, with both the OECD and IMF expecting global growth to remain sluggish in the next two years.
Despite this subdued growth outlook, many central banks are reluctant to continue on an easing path. Indeed, one central bank, Sweden’s Riksbank, hiked rates by 25bps before Christmas. Meanwhile, after cutting rates by 75bps in 2019, not one member of the Fed’s monetary policy committee sees a need for official rates to be reduced any further from their current level of 1.625%. The markets, though, are still pricing in one final 25bps rate cut, but not until later this year.
The ECB meeting last week also showed a central bank that is very much on hold, having introduced a broad range of easing measures last autumn. Indeed, it transpired that there was quite strong opposition on its Governing Council to the easing package, suggesting that the bar is high for any further measures to be sanctioned. Not surprisingly then, markets now see ECB policy remaining on hold over the next two years despite quite a downbeat outlook for the Eurozone economy.
In the UK, the Bank of England left policy unchanged in 2019 amidst considerable uncertainty over Brexit. However, the economy finished the year on a weak note, so the BoE may soon join the rate cutting brigade. Indeed, two of its nine Monetary Policy Committee members voted for a rate cut at the November and December meetings.
More recently, the outgoing BoE Governor, Mark Carney, said that if data remain weak, it could require a “relatively prompt response” from the bank. Markets give a 50:50 chance of a 25bps rate cut to 0.5% at this year’s first policy meeting on Thursday and have fully priced in a rate cut by the summer. However, it is expected to be ‘one and done’ in terms of UK rate cuts.
Monetary policy is not the only way to boost growth. The IMF notes that policy rates in many countries are close to their effective lower bound, leaving only limited room for monetary policy to combat a further weakening in growth. Central banks then, are running low on ammunition.
Thus, the IMF, OECD, ECB and others are calling on governments that have the budgetary space, to use fiscal policy to stimulate activity, if the need arises. The IMF is advocating that capital spending plans should be drawn up now in case they are needed - i.e. to have projects ready which can be quickly got off the ground to counteract a renewed weakening in growth.
The current very low interest rate environment also suggests that it would be an opportune time to ramp up badly needed infrastructure spending and public investment in mitigating climate change. Indeed, it could be argued that countries should be going down this route anyway given the subdued outlook for global growth.
Oliver Mangan Chief Economist, AIB