- Commodity crash, slower growth cause concern
- ECB, Fed drop reference to pivot
- RBA, BoC have already slowed the pace of rate hikes
FRANKFURT, Oct 28 (Reuters) – The world’s leading central bankers are beginning to fear an already struggling global economy will stall if they continue to hit the brakes, unnerved by falling commodity prices, turmoil in emerging markets and potential domestic hotspots .
Central bankers in the euro zone, the United States, Canada and Australia have all indicated that most of their string of aggressive rate hikes may be behind them, although inflation remains elevated.
This has fueled market speculation that central banks may be heading for a ‘pivot’, market lingo for a change of direction towards smaller rate hikes that would lower inflation without wreaking havoc on the economy and markets.
The main reason for this shift is a darker outlook for the economy as the Eurozone is now firmly in recession and the rest of the world is also struggling to varying degrees.
This is helping to lower commodity prices, which have been a major inflationary driver since the Russian invasion of Ukraine.
The most glaring example is that natural gas in Europe has fallen by 90% as feared shortages turned into a supply glut that existing infrastructure is struggling to digest.
Finally, there are fears of renewed bouts of the kind of financial instability seen in recent weeks in the UK, where pension funds have all but collapsed on rising long-term yields, and in emerging markets.
“Over the past two weeks, several G10 central banks have appeared ready for a turnaround,” said Alfonso Peccatiello, author of the financial newsletter Macro Compass.
“Why such a sudden change of heart? Because all of these jurisdictions have something in common: inherent fragilities.”
He highlighted the high mortgage debt in Canada and the sovereign debt in southern Europe, which cannot count on a bailout across the Alps due to the lack of a common rescue package in the eurozone.
Australia is also grappling with falling house prices, losses for pension funds and falling demand for its commodities.
Even the US economy, which has been strong to the point of overheating until recently, is showing signs of fragility, and the housing market is cooling.
DURABLE HIGH
But stubbornly high inflation makes the job of central bankers incredibly difficult. Prices rose faster-than-expected this month in Germany, France and Italy, data showed on Friday.
While central bankers can’t do anything about current inflation rates, the mere visual of runaway prices made it difficult to justify a ‘pan’.
This requires an extraordinary balancing act from central bankers: convincing the market that they are serious about bringing down inflation without stalling the economy.
“The Fed needs to pave the way for smaller rate hikes without sounding too dovish,” said Christian Scherrmann, US economist at DWS.
The European Central Bank attempted to do so on Thursday when it said it plans to raise rates “further” but has already made “significant progress” in taking fuel from the economy.
The change in tone was minimal, but it was enough for investors to price in smaller hikes later.
Euro-zone money market traders lowered their expectations for where they see the ECB’s top interest rate from 3% a few weeks ago to 2.6% on Thursday, although that rate recovered on Friday following inflation data.
“After yesterday’s jumbo rate hike, the December meeting could actually bring a dovish turning point,” said Carsten Brzeski, economist at ING.
Earlier in the week, the Bank of Canada surprised markets with a lower-than-expected rate hike, mirroring a similar move by the Reserve Bank of Australia. Some analysts also see the risk of a smaller hike by the Bank of England next week.
Most importantly, the Federal Reserve, which rules the world’s reserve currency and sets the pace for global financial markets, has started a debate about how much it can safely push up the cost of borrowing and how and when to slow the pace of future increases can be.
While a 75 basis point hike next week was seen as certain, investors are now positioning for a more cautious Fed going forward.
“It’s inevitable that the Fed will have to pause soon,” said Chris Iggo of Axa IM Investment Institute.
Editing by David Evans
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