Tony Ward is chief executive of Clayton Euro Risk
Back to the topic of interest rates. Don’t say it. I know, I know.
I doubt I was the only person to be pleased that Mark Carney and members of the MPC decided to leave UK interest rates unchanged at their meeting last week. Certainly the right decision.
So now our thoughts turn across the pond to what the Fed will decide to do this week. Notwithstanding the recent rise in the US inflation rate, other weaker-than-expected data might be used by the Federal Open Market Committee (FOMC), the bank’s decision-making body, as an excuse to delay a rate rise once again – possibly until December. And that seems to be where the smart money is, although some analysts have warned this is too complacent a view. We shall see.
With talk of interest rates and monetary policy high on the global agenda, the issue that most concerns me at the moment is that analysts are reporting a dip in investor sentiment. Trawling the press this weekend, I was struck by just how many column inches have been devoted to this discussion. From my reading, there certainly seems to be an element of the jitters out there.
Ian Harnett, co-founder of Absolute Strategy Research, suggests that investors are feeling ‘distinctly queasy’ and there has been ‘a definite souring of investor sentiment’ since the ‘relatively benign’ summer. Mark Dampier of Hargreaves Lansdown has also picked up on this unease, suggesting there is similar gloom amongst smaller investors. “People,” he said, “are as nervous as hell.” Mouhammed Choukeir, Kleinwort Benson, sums up the mood: “There was a period of calm over the summer but early signs of volatility are creeping back. There’s a mood of negativity around the world.”
And just today, the Bank for International Settlements (BIS) has warned that China has failed to curb excesses in its credit system and faces mounting risks of a full-blown banking crisis.
Why is this the case?
While concerns abound as to what the reality of Brexit looks like, this is not the point. There is a growing fear that economic growth around the world is slowing and policymakers have run out of tools to do anything about it. Mr Harnett said: “We’re getting towards the end-game for monetary policy opportunities. We’ve seen more and more central bankers saying we’re close to the end of the line for interest rate cuts and quantitative easing.”
Meanwhile the BIS concurs, saying that zero interest rates and bond purchases by central banks have left markets acutely sensitive to the slightest shift in monetary policy – even a hint of a shift. Claudio Borio, the BIS’s chief economist, said: “It is becoming increasingly evident that central banks have been overburdened for far too long.” According to the BIS, a troubling development is a breakdown in the relationship between interest rates and currencies in global markets. The concern is that banks are displaying a highly defensive reflex, and could pull back abruptly as they did during the Lehman crisis once they smell fear. “The banking sector may become an amplifier of shocks rather than an absorber,” said Hyun Song Shin, the BIS’s research chief.
A little troubling, to say the least.
So where do we go from here? Joined-up initiatives are needed and a cooperative approach from global leaders, otherwise negative sentiment will impact on economic growth.
Collective initiatives that are not bound to monetary policy are needed. And needed fast.