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Global central banks are gradually withdrawing easy monetary policy a decade since they began racing to the rescue of a world economy skidding into recession.
The Federal Reserve’s benchmark is now the highest since 2008 and officials are signalling another hike in December and more in 2019. Emerging markets from Argentina to India have acted to defend their currencies.
All told, 10 of the 22 central banks monitored in Bloomberg Economics’ quarterly outlook raised interest rates since the start of July. Seven are predicted to do so again before the end of this year.
Divergence among policy makers
That’s not to say global policy is tight and there is a sense of divergence among the big policy makers. The European Central Bank will buy assets until December and pledges not to increase rates before the summer. The Bank of Japan continues to deliver massive stimulus and the People’s Bank of China is alert to weakening growth.
Bloomberg Economics looked at central banks which together set policy for about 90% of the world economy. We outline what they’ve done lately and attempt to analyse what they will do next.
U.S. Federal Reserve Current federal funds rate (upper bound): 2.25% Forecast for end of 2018: 2.5% Forecast for end of 2019: 3%.
The Fed looks on course to raise rates by a quarter percentage point in December in a further step toward normalising monetary policy after opening up the spigots to fight the financial crisis and its aftermath. Policy makers have provisionally penciled in three more increases for next year, though they stress that could change depending on the evolution of the economy.
Chairman Jerome Powell has said the central bank is trying to strike a middle ground between raising rates too much and throwing the economy into recession and increasing them too little and risking an inflationary surge or an asset bubble. That task was easier when rates were ultra-low and seemed to have no direction to go but up. It’s becoming harder the closer that rates get to a “neutral” level that neither restricts nor spurs economic growth.
What Our Economists Say:
“The Federal Reserve interest-rate schedule will be vulnerable to a stronger dollar, reduced Fed balance-sheet holdings and a flat yield curve. The challenge for policy makers will be to avoid excessively braking the economy during a period when fiscal tailwinds are due to diminish and ultimately reverse. Bloomberg Economics had previously projected that policy makers could delay the fourth rate hike of 2018 to early 2019, but the odds of this occurring have clearly diminished in light of both the regrouping of the dot plot at the September FOMC meeting and the upgrade of the medium-term outlook. Nonetheless, the Fed can wait until more is known about trade frictions, yield-curve flatness, the second-half growth profile and even midterm election results before finalizing their December decision.” — Yelena Shulyatyeva
European Central Bank Current deposit rate: -0.4% Forecast for end of 2018: -0.4% Forecast for end of 2019: -0.15%
The ECB is pushing ahead with its plan to end asset purchases this year as euro-area inflation converges toward its goal. President Mario Draghi has highlighted a “relatively vigorous'” pickup in underlying price pressures, and the central bank says rates won't rise until after the summer of next year. Investors are betting on a first hike in late 2019.
Still, policy makers have stressed the downside risks, such as the ripple effects from a trade war between the U.S. and China. Emerging-market turbulence and the risk of a messy exit of the U.K. from the European Union are adding to uncertainty. Attention will soon turn who will replace Draghi a year from now.
What Our Economists Say:
“The recovery of the economy, accelerating wage growth and nascent signs of a pick-up in underlying inflation have provided the ECB with the confidence to end its asset purchase program in December and suggest the first interest rate increase will come in September 2019. We suspect it will be a mini-hike of 15 basis points to the deposit rate. That would restore normality to the ECB’s interest rate corridor. A full 25-basis point increase to all its rates is likely to follow six months later.” — David Powell
Bank of Japan
Current policy-rate balance: -0.1% Forecast for end of 2018: -0.1% Forecast for end of 2019: -0.1%
The BOJ is forging ahead with its massive monetary stimulus while its peers chart a return to pre-crisis policies. After a few tweaks to policy settings in July, there’s little prospect of change soon, given that inflation remains less than halfway to the BOJ’s 2 percent target.
A majority of economists now expect Governor Haruhiko Kuroda to keep his current yield-curve settings in place at least through the end of 2019, with the short-term rate locked at -0.1 percent and the 10-year bond yield target at around 0 percent. The BOJ's moves in July were aimed at setting itself up for the longer haul by slowing a buildup in side effects. Among other things, it said it would let the 10-year yield move a bit more freely and cut the amount of reserves subject to the negative rate. The tweaks convinced economists to push back their forecasts for change.
What Our Economists Say:
“The BOJ will need to maintain its extreme stimulus for the foreseeable future, given persistently slack inflation and mounting risks to growth from U.S. protectionism and China’s slowdown. At the same time, financial imbalances -- the BOJ’s ballooning balance sheet, a distorted JGB market, and strains on regional banks’ profitability -- are mounting. That said, the BOJ’s next financial system report due in late October will take on greater-than-usual importance in assessing negative side effects of the extreme stimulus and any potential need for further adjustments to the policy framework.” —Yuki Masujima
Bank of England
Current bank rate: 0.75% Forecast for end of 2018: 0.75% Forecast for end of 2019: 1.25%
Bank of England Governor Mark Carney, having recently extended his term to help through Brexit, must now contemplate when to push for another rate increase. He and his colleagues voted to bring borrowing costs to the highest since 2009 in August, and markets foresee the next hike in May.
The big question is what happens after March 29, 2019, when the U.K. formally leaves the European Union. If the transition is turbulent, Carney has warned that the BOE may not be able to help with a cut like it did after the referendum. In fact, it may have to raise rates even faster than planned to keep a lid on inflation.
What Our Economists Say:
“The Bank of England is in a bind. On one side, recent data suggest price pressures may be building faster than it expected in its recent forecasts. But on the other, there’s Brexit and the risk the U.K.’s departure from the EU is disorderly. That tail risk is likely to mean the central bank is more tolerant of upside data surprise than normal. Assuming Brexit is smooth, we expect another hike in May next year.” —Dan Hanson
Bank of Canada
Current overnight lending rate: 1.5% Forecast for end of 2018: 1.75% Forecast for end of 2019: 2.38%
The Bank of Canada has raised rates four times since mid-2017 to keep inflation from moving permanently beyond its 2 percent target, and indicated it will need to make additional hikes to bring borrowing costs back to more normal levels in an economy that is running at near capacity. The negotiation of a new trade pact with the U.S. and Mexico -- which removes the biggest risk to the economy -- will have only cemented policy makers’ resolve. Swaps trading suggests investors are pricing in as many as four more rate increases over the next 12 months -- bringing the benchmark overnight rate to 2.5 percent.
But one question remains: how high do rates need to go before hitting normal. The central bank’s economists estimate the economy’s “neutral” rate is somewhere around 3 percent, but most investors expect it to settle well below that level since the country’s large debt overhang will continue acting as a long-term drag on growth. After the next four hikes, the expectation is the Bank of Canada will stay on hold for a very long time.
What Our Economists Say:
“The Bank of Canada is set for two more interest-rate hikes in 2018. With the U.S.-Mexico-Canada trade agreement reached at the end of September, economic headwinds have dissipated. The BoC can now turn its full attention to curbing intensifying inflationary pressures as the unemployment rate hovers near historic lows.” —Tim Mahedy
People’s Bank of China
Current 1-year best lending rate: 4.35% Forecast for end of 2018: 4.35% Forecast for end of 2019: 4.35%
With the economy facing the double threat of trade war and deleveraging drive this year, the PBOC has shifted to a more accommodative monetary stance. The central bank has now refrained for two quarters from matching Fed hikes with increases in borrowing costs for domestic money markets.At the same time, policy makers are using all tools short of outright monetary easing to funnel credit to the parts of the economy that need it while growth slows. They’re having a tough time though, as banks remain reluctant to lend. While calibrating domestic liquidity needs, officials also have to remain mindful of the downward pressure that too much supply could have on the yuan – the onshore yuan has weakened 5.5 percent so far this year.
What Our Economists Say:
“As part of concerted efforts to support growth, the People’s Bank of China has provided monetary accommodation in recent months, including reducing reserve and capital requirements, and increasing medium-term liquidity provisions. The impact of these policies has been limited so far. Many firms, especially smaller ones, are running into difficulty accessing funding. More monetary policy support is expected in the remainder of 2018, especially against a background of looming escalation in a trade war with the U.S. There can be further reserve requirement cuts, and the possibility of an interest rate cut has risen. Also importantly the central bank needs to do more to unclog the lending channels.” —Chang Shu
Reserve Bank of India
Current repo rate: 6.5% Forecast for end of 2018: 6.75% Forecast for end of 2019: 6.75%
India’s central bank surprised markets in early October by keeping rates steady but changed its neutral stance and adopted a more hawkish bias. That meant more rates increases are on the table in the coming months as the central bank grapples with a weakening rupee, elevated crude oil prices and a widening current account deficit due to slowing capital inflows.
What Our Economists Say:
“The Reserve Bank of India delivered a hawkish pause, in line with our forecast but bucking expectations for another rate hike. The hold was consistent with recent cooling in inflation and increasing headwinds to growth. The central bank’s hawkish tone in its statement reflected concern about upside risks to consumer prices mainly from rising oil prices and rupee weakness. Looking ahead, we see inflation continuing to undershoot the RBI’s forecasts, as a widening output gap reduces price pressures. That should keep the RBI on hold in December, in our view” — Abhishek Gupta
Central Bank of Brazil
Current Selic target rate: 6.5% Forecast for end of 2018: 6.5% Forecast for end of 2019: 8.0%
Brazil’s central bank is prepared to gradually raise its key rate from an all-time low if domestic or external turbulence boosts inflation above target. So far, prices have been rising at a moderate pace, but currency losses of nearly 20 percent so far this year have put policy makers on alert.
The real could suffer additional losses, resulting in pass-through to prices, if Brazil’s next president refrain from market-friendly reforms or emerging markets go through another period of heightened turbulence, or both. Yet dwindling consumer demand and a disappointing economic recovery have kept inflation expectations at or below target through 2020, providing some breathing room for the central bank.
What Our Economists Say:
“Well anchored inflation and inflation expectations, high unemployment and weak economic growth that limit demand driven pressure on consumer prices and the risk of second round effects from currency depreciation should be enough for policy makers to maintain low interest rates this year. Recovering economic growth in 2019, lingering fiscal and political challenges and tighter external financial conditions suggest interest rate hikes to move to neutral monetary conditions could be necessary next year. Bloomberg Economics expects the central bank to maintain interest rates at 6.50% this year, and moderate interest rate hikes in 2019.” —Felipe Hernandez
Bank of Russia
Current key rate: 7.5% Forecast for end of 2018: 7.5% Forecast for end of 2019: 7.25%
A round of U.S. sanctions put the Bank of Russia’s easing on hold earlier this year. The threat of more penalties to come then forced it to hit the reverse gear in September. Confronting turmoil across emerging markets and mounting inflation risks following a slump in the ruble, Governor Elvira Nabiullina surprised almost all forecasters with Russia’s first increase in rates since 2014.
The path forward is mired in uncertainty. With the benchmark now at 7.5 percent, a level last seen in March, rate cuts may not resume for more than a year. The ruble’s performance may dictate much of what happens now. Besides striking a tough tone that left open the possibility of further tightening, the central bank has also done its part by extending a pause in foreign-exchange purchases for reserves until the end of December, easing pressure off the Russian currency. With inflation still well below the 4 percent target, policy makers may take a breather from any further action for the rest of the year.
What Our Economists Say:
“The Bank of Russia has taken a hawkish turn, with inflation on course to surge above target in 2019. September saw a surprise rate hike, as well as a warning that further tightening is possible. That will probably prove unnecessary unless another round of sanctions renews the slide in the ruble. We expect the key rate to remain at 7.5% until late next year.” —Scott Johnson
South African Reserve Bank
Current repo average rate: 6.5% Forecast for end of 2018: 6.5% Forecast for end of 2019: 6.75%
The South African Reserve Bank is likely to hold its key rate unchanged at its last policy announcement in November. It will increase its hawkish talk, especially as the Monetary Policy Committee now has only six members following the retirement of dovish Brian Kahn.
The central bank is caught between its goal of keeping inflation close to 4.5 percent and the needs of an economy that fell into a recession in the second quarter. While Governor Lesetja Kganyago has said the central bank will wait for the broader effects of a weaker rand on prices, he also says low inflation is the only way to bolster the economy. Unless there’s a huge shock to the currency or the price of oil in the next two months, the earliest date for policy tightening is January.
What Our Economists Say:
“We have brought forward our forecast for the South African Reserve Bank rate hiking its policy rate by 25 basis point to 6.75% to November from 1Q19 previously. This is due to a higher-than-expected three monetary policy committee members voting in favor of a rate hike at the September meeting. The MPC has reverted to six members following the retirement of Kahn, who we view as the most dovish member of the committee in recent years. A 3-3 vote now seems likely in November, leaving the decision to Governor Lesetja Kganyago, who tipped the scales towards the more hawkish option in three split rate-setting meetings in 2016-17.” —Mark Bohlund
Banco de Mexico
Current overnight rate: 7.75% Forecast for end of 2018: 7.75% Forecast for end of 2019: 6.75%
Mexico’s central bank is widely thought to have concluded its monetary tightening campaign, with the key rate peaking at 7.75 percent, the highest in 10 years. It will likely start cutting it by mid-2019, as consumer prices edge lower from the current level of 4.88 percent toward a 3 percent inflation target.
A bilateral trade agreement signed in August between the U.S. and Mexico removes some of the market anxiety that had been weighing on the Mexican peso. Pass-through pressures from the recent currency depreciation are subsiding. The central bank has said one of the best indicators for monetary policy is core inflation, which remains within range.
What Our Economists Say:
“Banxico will remain cautious and keep tight monetary conditions. Additional interest rate hikes may not be necessary, but there is little scope to reduce interest rates. Inflation remains above the 3.0% plus or minus one percentage point target. Core inflation and inflation expectations are relatively stable and within the target, but still above the mid-point. Economic growth has been resilient and near potential, and together with low unemployment show there is little slack in the economy. Political and policy risks have abated after the elections in July and the preliminary trade agreement in August, but lingering uncertainty ahead of the inauguration of the new government in December and finalization of the trade deal is still a constraint. Expectations for the Federal Reserve to continue rising interest rates also limits policy flexibility. Bloomberg economic expects Banxico to maintain interest rates at 7.75% until late in the first half in 2019 when it could start easing monetary conditions.” —Felipe Hernandez
Central Bank of Turkey
Current 1-week repo rate: 24% Forecast for end of 2018: 24% Forecast for end of 2019: 20%
The most recent run on the Turkish lira is likely to push consumer inflation to more than four times the official target of 5 percent during the last quarter of the year.
That leaves the Turkish central bank in a difficult place. On the one hand, monetary policy makers are facing the wrath of President Recep Tayyip Erdogan who attacked the bank for its most recent rate hike in September. At the same time, collapsing consumption and manufacturing activity indicate that the Middle East’s largest economy is in no need of another round of monetary tightening whereas inflation continues its climb regardless of the dire straits domestic demand is in. What the central bank does next is critical to the fate of the lira and to Turkey’s corporates which heavily relied on FX financing in the past and are now struggling to service debt due to the lira’s collapse.
What Our Economists Say:
“The central bank’s failure to raise rates in July arguably triggered the subsequent collapse of the lira. It partially restored some credibility with an aggressive 625 basis-point rate hike in September, despite President Erdogan’s protests. Higher rates now could mean lower rates in the future, if the currency remains stable. But despite a slowing economy, rate cuts are unlikely to materialize before 1Q19, when we expect inflation to peak.” — Ziad Daoud
Central Bank of Nigeria
Current central bank rate: 14% Forecast for end of 2018: 14% Forecast for end of 2019: 13.5%
Nigeria may hold borrowing costs at this year’s last rate-setting meeting in November as policy makers wait for a sharper pickup in inflation before increasing the benchmark from an already record-high 14 percent.
The rate of price growth in Africa’s largest oil producer bottomed in July and the central bank has flagged election spending ahead of the February vote as a risk. Three of ten Monetary Policy Committee members voted for tighter policy at the last two meetings and this number would gradually rise until the panel increases rates in the first half of next year.
What Our Economists Say:
“The Central Bank of Nigeria gave the distinct impression that a rate hike was drawing closer at the end of its Sept. 24-25 meeting. We believe a sharper rise in cost pressure and a stronger contribution from non-food prices will be needed to secure a majority in favor of a hike in coming meetings. The reduced pressure on the naira’s fixed exchange rate to the U.S. Dollar thanks to the higher oil price should also reduce the need for a rate hike. We expect the key rate to be held at 14% for the rest of the year.” —Mark Bohlund
Bank of Korea
Current base rate: 1.5% Forecast for end of 2018: 1.75% Forecast for end of 2019: 2%
The Bank of Korea began its rate-hike cycle almost a year ago, raising the benchmark from a record low 1.25 percent. Governor Lee Ju-yeol has indicated the direction ahead is up, but he and the policy board have stood pat since last November as they’ve weighed competing concerns.
Record household debt and an economy that’s set to grow nearly 3 percent this year suggest higher rates are in order. So does the widening gap between Korean and U.S. rates, which could draw capital out of South Korea. But a sharp slowdown in job growth and the U.S.-China trade battle have raised concerns about the outlook for the export-dependent Korean economy, giving policy makers reason for caution.
Reserve Bank of Australia
Current cash rate target: 1.5% Forecast for end of 2018: 1.5% Forecast for end of 2019: 1.75%
The RBA has been stuck in a holding pattern: its central scenario is for record-low rates to boost confidence and investment and tighten the labor market. That should drive faster wage growth and inflation and lay the ground for the first rate hike since 2010. But it’s taking a lot longer than expected to unfold.
There are positive signs, with the economy expanding at an above-average pace and unemployment grinding down to 5.3 percent, though still above a level that would prompt employers to offer higher pay to attract scarcer labor. Like other developed economies, Australia’s workforce seems to expand every time there’s a burst of hiring, and that spare capacity is resulting in real wages stagnating.
Still, economists and markets are gradually falling into line with the central bank’s view. Among risks to the outlook are households grappling with record debt and falling property prices that combined pose a risk to consumption. Australia is also in the firing line of the trade war, given it’s the most China-dependent economy in the developed world. On the upside, a decline in the Aussie dollar could speed the route to rate normalization by hastening inflation’s return to the midpoint of the RBA’s 2-3 percent target.
What Our Economists Say:
“Australia’s growth is on track to pickup and slightly exceed potential this year and next. Even so, obstacles to tightening monetary policy remain. The strongest employment growth in more than 35 years has done little to lift wages. What’s more, heavily-indebted households are vulnerable to higher borrowing costs, and balance sheets continue to deteriorate from an already high level of leverage. The climate for investment, a key driver of the expansion this year and next, has become more challenging. Plans for capital expenditure in the private sector suggest headwinds, instead of tailwinds for growth through mid-2019. We think the RBA will leave the cash rate target unchanged at an all-time low of 1.5 percent through 2018 and most, if not all, of 2019.” —Tamara Henderson
Saudi Arabian Monetary Authority
Current repo rate: 2.75% Forecast for end of 2018: 3% Forecast for end of 2019: 3.63%
Saudi Arabia’s currency peg to the dollar means its rate decisions tend to track the Fed. The Saudi Arabian Monetary Authority has increased its key rate by 75 basis points this year to minimize pressure on the peg, despite the kingdom’s fragile economic recovery.
What Our Economists Say:
“The Saudi Arabian Monetary Authority doesn’t have major decisions to make. The currency peg to the dollar means that interest rates closely follow the Fed’s. They’ve already risen by 75 basis points this year. That should be it for 2018 with another 75 basis-point rate increase expected in 2019.” —Ziad Daoud
Outlier: Central Bank of Argentina
Current target: to freeze the expansion of monetary aggregates
Argentina’s central bank is no longer setting overnight rates or inflation targets. Under the terms of a revised agreement with the International Monetary Fund, policy makers – no led by Guido Sandleris – will now target monetary aggregates in a bid to freeze the expansion of money supply in the economy.
The new strategy comes as Argentina’s money supply expanded at about 2 percent a month and the benchmark rate was at a world-high 60 percent. Annual inflation has soared above 30 percent.
What Our Economists Say:
“Interest rates are poised to remain high and in-line with tight monetary conditions, as the central bank has pledged that the monetary base will not increase in nominal terms until June 2019 and interest rates in daily open market operations will be no lower than 60% until December 2018. Defending the exchange rate band announced in September to limit peso depreciation could result in additional tightening if the currency comes under renewed weakening pressure. Tight domestic and external financial conditions are likely to push the economy into recession. IMF support and revamped government commitment to address lingering imbalances set the bases to restore market confidence, ease monetary conditions and reduce interest rates in the medium-term. Initial benefits are still limited by skepticism after authorities fell short of previous goals and concerns about implementation risks ahead of the election in 2019 and policy continuity in the next administration.” —Felipe Hernandez
Swiss National Bank
Current Libor target rate: -0.75% Forecast for end of 2018: -0.75% Forecast for end of 2019: -0.50%
Since shocking markets in January 2015 by abolishing its minimum exchange rate, the Swiss National Bank has kept policy on hold, sticking with the lowest rates of any major central bank and a pledge to intervene in currency markets if necessary. While the economy is expanding apace, the franc has rallied against the euro in recent months, on the back of investor unease about Italy, Turkey and Argentina, reviving memories of the European sovereign debt crisis, when the SNB waged heavy interventions.
With rate-setters in Frankfurt pledging to keep borrowing costs at rock bottom through next summer, the SNB is very likely to stick with its current policy for the foreseeable future, so as not to exacerbate pressure on the currency. President Thomas Jordan and his colleagues have also grown more dovish on the inflation forecast, meaning they have ample space to keep policy accommodative.
Sveriges Riksbank
Current repo rate: -0.5% Forecast for end of 2018: -0.25% Forecast for end of 2019: 0.25%
Sweden’s central bank is coming closer to raising rates for the first time in seven years. Policy makers in September sharpened their outlook and said they would tighten by a quarter point either in December or February. Even the bank’s most dovish members are now coming around to that the long struggle to lift inflation back toward its 2 percent target is coming to an end.
While some members on the executive board have argued that tightening should start sooner, core inflation remains a concern. Governor Stefan Ingves is advocating a cautious approach after so many years with below-target price growth and so much invested in restoring credibility. A slowdown in global economic momentum will no doubt not make the job any easier in Stockholm.
Norges Bank
Current deposit rate: 0.75% Forecast for end of 2018: 0.75% Forecast for end of 2019: 1.25%
Norway’s central bank moved ahead of its peers in Stockholm and Frankfurt and raised rates for the first time in seven years in September. The economy of western Europe’s biggest oil exporter has fully recovered amid surging crude prices and unemployment looks to have bottomed. Inflation is close to the 2 percent target and the krone is near a record low, giving room for further increases.
While he started lifting rates from a record low, Governor Oystein Olsen also at the same time lowered his projections for how fast he will tighten in the years ahead, citing some concerns about domestic and global growth. The bank indicates two more quarter point hikes in 2019.
Reserve Bank of New Zealand
Current cash rate: 1.75% Forecast for end of 2018: 1.75% Forecast for end of 2019: 2%
Governor Adrian Orr surprised markets and observers with a dovish tilt when releasing the RBNZ’s latest forecasts in August, saying he didn’t expect to raise rates for at least another two years and might have to cut them if the economy fails to gather pace. Orr is concerned that a slump in business confidence could curb investment, damp growth, and keep inflation below the 2 percent midpoint of his 1-3 percent target band. Still, recent upbeat data and the prospect that increased government spending will boost growth have seen investors pare bets on a rate cut for now.
What Our Economists Say:
“The Reserve Bank of New Zealand is signaling steady interest rates through all of next year and into 2020. The official policy bias is neutral, recognizing both upside and downside risks to growth and inflation. Even so, keeping the policy setting at an "expansionary level" for a "considerable period" signals greater concern about growth than inflation, in our view. Inflation at 1.3% year on year on average in 1H was close to the lower end of the 1-3% target, while growth (2.7% in 1H) was well below the Reserve Bank’s estimate of potential (3.1%). Looking ahead, domestic demand faces headwinds from a clampdown on immigration and a souring in business confidence. Meanwhile, the global growth outlook is more challenging with the U.S. and China embroiled in an escalating trade war.” —Tamara Henderson
Methodology: Based on median estimate in monthly or quarterly survey, where available, or most recent collected forecasts. All interest rate and forecast data is as of Oct. 2. Bloomberg Economics’forecast used for Indonesia.
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