The European Central Bank, seen here, extended liquidity support for banks into 2011 on Sept. 2. Photographer: Hannelore Foerster/Bloomberg
Central banks across five continents are undertaking the broadest reduction in borrowing costs since 2009 to avert a global economic slump stemming from Europe’s sovereign-debt turmoil.
With national leaders unable to increase spending or cut taxes, policy makers including Australia’s Glenn Stevens and Israel’s Stanley Fischer are seeking to cushion their economies from Europe’s crisis and U.S. unemployment stuck near 9 percent. Brazil and India are among countries where easing or forgoing higher interest rates runs the risk of exacerbating inflation already higher than desired levels.
“We’ve seen central banks that were hawkish begin to turn dovish” against a “backdrop of austerity” in fiscal policy, said Eric Stein, who co-manages the $6.6 billion Eaton Vance Global Macro Absolute Return Fund in Boston. “You could debate how bad it will be for growth, but it can’t be good,” he said of the challenges facing the world economy.
Global Rate
Monetary easing will push the average worldwide central bank interest rate, weighted for gross domestic product, to 1.79 percent by next June from 2.16 percent in September, the largest drop in two years, according to data and projections from JPMorgan, which tracks 31 central banks. The number of those banks loosening credit is the most since the third quarter of 2009, when 15 institutions cut rates, the data show.
Low short-term borrowing costs through at least the end of 2012 mean that “markets that provide reasonably good interest income should perform well,” said James Kochan, chief fixed- income strategist at Wells Fargo Advantage Funds. High-yield corporate-bond mutual funds are attractive, as are government debt in “resource-rich” countries including Australia and Norway, he said.
“There’s a common theme almost throughout the world and that is either growth has been disappointingly slow or now it’s slowing,” said Kochan, who helps oversee $213.6 billion and is based in Menomonee Falls, Wisconsin. Europe’s debt crisis “has a lot of central banks very concerned” because of its implications for exports from the U.S., China and other countries, he said.
Asia Inflation
While central banks in Australia and Indonesia have reduced borrowing costs and the Bank of Japan increased asset purchases in October, other countries in Asia may be slower to ease policy.
The People’s Bank of China has raised its main interest rate three times this year to fight inflation. India’s central bank lifted rates on Oct. 25 by a quarter of a percentage point, while signaling it was nearing the end of its record cycle of increases as the economy cooled.
“Most central banks will wait and see how the situation develops in Europe,” said Joseph Tan, Singapore-based chief economist for Asia at Credit Suisse Group AG’s private-banking division. “If we do have a continuation of the political impasse in Europe and that leads to a recession in Europe, and the U.S. economy starts to slow again, then Asian central banks will cut interest rates.”
Investors Flee
The ECB under new President Mario Draghi is seeking to limit contagion in the 17-nation euro zone as Greece’s economic meltdown worsens. Investors are fleeing a group of sovereign bonds that’s expanded to include those of Italy and France, driving up those nations’ borrowing costs.
Yields on 10-year French debt increased to 3.60 percent as of 12:08 p.m. London time from 2.44 percent in September. Italy’s 10-year bond yields were at 7.08 percent, up from 4.52 percent in February. German 10-year rates have declined to 2.31 percent from 3.51 percent in April even after Germany failed to get bids for 35 percent of the 10-year bonds it offered Nov. 23.
Draghi led the ECB’s governing council in a 25 basis-point interest-rate cut on Nov. 3, his third day in office, saying at a press conference in Frankfurt: “What we’re observing now is slow growth, heading toward a mild recession.”
Economists at Barclays Capital and JPMorgan Chase are among those predicting the ECB will cut its key rate another quarter- point next week, reversing the ECB’s increases of April and July under former President Jean-Claude Trichet. They expect the benchmark then to be reduced to what would be a record low of 0.5 percent in 2012.
Global Cuts
Europe’s turmoil has led Australia, Brazil, Denmark, Romania, Serbia, Israel, Indonesia, Georgia and Pakistan to reduce interest rates since late August. Chile, Mexico, Norway, Peru, Poland and Sweden are also forecast by JPMorgan Chase to lower borrowing costs by the end of the first quarter, while Australia, Brazil, Indonesia, Israel and Romania may cut rates further.
In the U.S., Federal Reserve Chairman Ben S. Bernanke is considering further actions to lower borrowing costs in the world’s biggest economy. He vowed in August to keep the benchmark interest rate close to zero through at least mid-2013. The central bank in September decided to replace $400 billion of short-term securities it holds with longer-term debt to reduce rates on extended-maturity debt.
Fed governors and regional-bank presidents revised their economic projections this month to show they expect joblessness to decline by 1 percentage point over the next two years, more slowly than the 1.5-point drop forecast in June.
QE3 Forecasts
Some officials indicated the outlook “might warrant” more easing, minutes of the Fed’s Nov. 1-2 meeting showed last week. Sixty-nine percent of analysts surveyed in October said Bernanke’s Fed will embark on a third round of quantitative easing, or QE3.
The Fed will start another program next quarter, 16 of the 21 primary dealers of U.S. government securities that trade with the central bank said in a Bloomberg News survey last week. The Fed may buy about $545 billion in home-loan debt, based on the median of the 10 firms that provided estimates.
The failure of the so-called supercommittee of U.S. lawmakers charged with agreeing on $1.2 trillion of deficit reduction by Nov. 23 “adds immensely” to the pressures on Bernanke, said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a Washington research and advocacy group.
‘Feel Sorry’
“You’ve got to feel sorry for the people at the Fed who have to keep cleaning up the mess that the fiscal policy makers leave,” MacGuineas said.
In Europe, the two-year-old debt crisis leaves no room for fiscal stimulus. National leaders have specifically ruled out extra spending as euro members France, Italy, Spain, Portugal, Ireland and Greece adopt austerity packages, as has the U.K.
“There’s no scope for fiscal expansion” in most countries, said Steven Bell, chief economist at hedge fund GLC Ltd. in London, and a former U.K. Treasury economist. Nations “spent out bullets to excess, in many cases, in the global financial crisis.”
The Bank of England, which has kept its main interest rate at 0.5 percent since March 2009, is likely to increase its bond- purchase program by 150 billion pounds ($232 billion) to 425 billion pounds by May, said David Hensley, director of global economic coordination at JPMorgan in New York.
Inflation Concern
Policy makers in much of the developing world, including Asia, are reluctant to ease with inflation high and the chance of economies overheating, Hensley said. Instead, they’re more likely to keep interest rates unchanged, he said.
India’s central bank has raised interest rates 13 times to 8.5 percent to control inflation that has stayed above 9 percent this year. “The central bank would prefer to hold policy interest rates steady for a prolonged period,” said Siddhartha Sanyal, chief economist for the country at Barclays Plc in Mumbai. He worked at the Reserve Bank of India from 1999 to 2007.
In China, the world’s second-largest economy, the central bank on Nov. 16 reiterated Premier Wen Jiabao’s pledge to “fine-tune” policies when needed. While inflation may continue to moderate, “the foundation for price stability is not yet solid,” the bank said in its third-quarter monetary policy report.
At the same time, slowing inflation is spurring speculation that China will loosen credit, and a rebound in lending in October may signal that bank-loan quotas have already been eased.
‘Enormous Scope’
“They’ve obviously got enormous scope to ease, both monetarily and fiscally,” said GLC’s Bell.
Investors see risks of accelerating prices in Brazil, which has cut its benchmark Selic interest rate twice to 11.5 percent. Inflation expectations jumped after the cuts, according to a weekly central bank survey of economists. They now expect inflation to exceed the mid-point of its target until 2015, from a forecast of 2013 before the move.
Some companies are attesting to signs of an economic slump. Hartford Financial Services Group Inc. (HIG), the life and property- casualty insurer, sees “substantial uncertainty about economic and fiscal policy,” Chief Executive Officer Liam McGee said in a Nov. 3 conference call. The Hartford, Connecticut-based company “is prepared to face a potentially challenging environment through the balance of the year and into 2012.”
Honeywell Inc. (HON) sees a “slow-growth environment” as a “high-probability outcome” in 2012, CEO David Cote said Oct. 21 on a conference call with investors.
“If governments don’t even do the minimal amount possible, we can end up with a recession, and then all businesses will get affected,” said Cote, leader of the Morris Township, New Jersey, maker of aerospace and automation equipment.
Central banks are trying to fight against fiscal “dithering” as well as a credit squeeze that’s evidenced in the Bloomberg Financial Conditions Index, said Anthony Crescenzi, executive vice president at Pacific Investment Management Co., which oversees the world’s biggest bond fund in Newport Beach, California.
“In terms of global easing, it should run well into next year,” he said.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
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