US consumer — From king to prince

Central banks across the world have been cutting their policy rates in unison since early May, in line with our forecast back in January that “policy rate cuts, which have all but disappeared since last Spring, may yet resurface in the second half of 2019 (see Forecast Update: Brexit, FX, central banks & GDP growth, 18 January 2019).

Our measure of the GDP-weighted average of central bank policy rates in developed and emerging market (EM) economies has fallen 32bp since late-April to 2.40%, with developed and EM central bank policy rates down respectively 26bp and 43bp to 0.8% and 5.1%.

Moreover, the ECB announced a resumption of its QE program as of November to the tune of €20bn per month, with the ECB and SNB also introducing tiered interest rates for banks.

One recurring theme is that with policy rates already low (and in some cases in negative territory) central banks have very little, if any, ammunition left and that in any case monetary policy easing measures will do little to reflate global economic growth and inflation, in part because the transmission mechanism is broken and/or distorted. As a result the ECB and IMF have called for more stimulative fiscal policies (and fiscal reform) to do some of the heavy lifting.

Our view is that central banks, in both developed and EM economies, have room to cut their policy rates further in coming months particularly as global headline and core CPI-inflation has fallen to the weak end of multi-year ranges. In most economies, central banks’ “real” policy rates are indeed still high relative to history and relative to global GDP growth which we estimate slowed to a 10-year low of 2.8% yoy in Q3 (see Figure 10).

We expect global core and headline CPI-inflation to stabilise and then rise in the next six months, as a result of the lagged impact of policy rate cuts in the past five months and recent spike in crude oil prices, but this does not negate further modest rate cuts.

The recent turmoil in the US repo market and rise in some key Eurozone inter-bank lending rates are, however, an extra hurdle for the Federal Reserve and ECB to address.

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