Central bankers may fail King’s 'boring' test on rates
Bank of England governor Mervyn King says interest rates should be so predictable that investors view policy-making as “boring”. On the evidence of economists’ forecasts for 2007, the world’s central bankers may fail his test.
By Agencies |
PARIS/WASHINGTON: Bank of England governor Mervyn King says interest rates should be so predictable that investors view policy-making as “boring”. On the evidence of economists’ forecasts for 2007, the world’s central bankers may fail his test.
A year ago, economists were almost unanimous in predicting US, Japanese and European rates would go up in 2006 — and they were right. This time, some of them will be seriously wrong, reflecting the likelihood of a far more volatile global economy where the risks of inflation on the one hand and slowing growth on the other are more evenly balanced.
“Maybe things aren’t going to be so boring after all, and there are reasons why you should worry that they could be dicier,“ John Lipsky, first deputy managing director of the International Monetary Fund, said in a December 21 interview.
Goldman Sachs Group expects Federal Reserve chairman Ben S Bernanke and his colleagues to cut the Fed’s benchmark rate to 4.5%; Barclays foresees a rise to 6%. ABN Amro Holding NV says European Central Bank President Jean-Claude Trichet and ECB policy makers will lift their main rate twice, to 4%, while Deutsche Bank says the ECB will cut by year’s end. Estimates for the Bank of Japan and King’s own Bank of England are similarly split.
“We’ve not seen this kind of divergence for quite some time,” says Avinash Persaud, chairman of London-based financial consultant Intelligence Capital. This year’s predictability helped keep stock-market volatility close to the lowest level in a decade, as measured by the Chicago Board Options Exchange’s SPX Volatility Index.
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That’s about to change, according to a Merrill Lynch survey of 210 fund managers: The survey indicated 77% expect higher stock-market volatility next year. For economists, the debate comes down to how severe the US slowdown will be and how well the rest of the globe copes with it. The world’s biggest economy slowed to an annual growth rate of 2% in the third quarter from 5.6% six months earlier, as a housing recession and an auto-industry slump sapped demand. Goldman, which expects the Fed to cut rates in the second quarter, sees “increasing evidence that the inflation scare of 2006 is over” and expects growth to “remain below trend”. ean Maki, chief US economist at Barclays Capital in New York, takes a contrary view, predicting the fallout in the housing market will soon pass and inflation will remain above Bernanke’s comfort zone of 1 to 2%.
“Once it becomes clear that the worst of the housing-market contraction is behind us and the economy is on a solid footing, we expect the Fed to turn its attention to inflation,” says Maki. US economic growth will slow to 2.5% in 2007 and the Fed will cut its benchmark rate a half-point to 4.75%, according to the median forecasts in a Bloomberg News survey of 79 economists. The range of individual forecasts, though, is much wider than it was a year ago.
Predictions of the Fed’s benchmark rate six months from now range from 3% to 5.75%; a year ago the high and low forecasts for June 30, 2006, were separated by just a percentage point. Similarly, forecasts of second-quarter economic growth range from a contraction of 1.4% to expansion of 4.3%; a year earlier, growth forecasts for the second quarter of 2006 were all between 2% and 4.5%.
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