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Major central banks tear up interest rate plans as market turmoil forces them into reverse

Carnage in the markets forces G7 central banks to put rate rises on hold and raises prospect of further cuts this year Markets are hoping that central bankers will move into reverse to support global growth Photo: Alamy By Peter Spence, Economics Correspondent

8:41PM GMT 13 Feb 2016


The world’s most powerful central banks will be forced to tear up their plans following the carnage that has engulfed financial markets since the beginning of the year.

Investors now believe there will not be a single interest rate rise from any of the G7 group of central banks this year, while the number of expected rate cuts this year has increased from zero to six.

"There’s just so much gloom about everything at the moment"
Dario Perkins

The data, compiled by Danske Bank analysts, suggests investors believe monetary policymakers could slash rates and pump up their quantitative easing programmes in a bid to stabilise the economic outlook.

Carefully laid battle plans to start tightening monetary policy have been left in tatters.

At the beginning of the year the market was pricing in the possibility of two rate hikes by the US Federal Reserve in 2016. Now, after a turbulent week for global stock markets, investors believe there will be no moves at all this year.

The big swing in expectations comes after world stock markets fell into “bear market” territory, as money managers fled from stocks to safe haven assets such as bonds and gold. “There’s just so much gloom about everything at the moment,” said Dario Perkins, an economist at Lombard Street Research.

Central banks have cut their rates 637 times since the collapse of Bear Stearns in March 2008. They have also purchased a combined $12.3 trillion (£8.5 trillion) of assets, according to Bank of America Merrill Lynch.

There were no expectations at the beginning of the year that the European Central Bank would cut interest rates. But now traders believe it will actually reduce its rates, which are already below zero, a further three times. Cuts are also expected from Japan and Canada.

"If central banks do nothing, then we could be in trouble"
Luke Hickmore

Traders are wary, however, that Mario Draghi, the ECB president, could disappoint in the same fashion that he did last December, building up anticipation stimulus before an ECB policy meeting, and then failing to deliver. Mr Draghi “can’t not deliver” at the ECB’s next meeting, Mr Perkins said.

The Federal Reserve, which raised its rates for the first time in nearly a decade last December, is now stuck. Economists at BNP Paribas consider it “locked out”, unable to continue increasing its rates until 2018: “We see the Fed as trying to manage a retreat in an orderly fashion, while hoping for the best. We do not think the best will materialise.”

Luke Hickmore, an investment manager at Aberdeen Asset Management, said: “The only debate that’s worth having is whether this is the start of another financial crisis. It probably isn’t but financial markets are a seething ball of fear that it is. “The big factor in whether this market volatility feeds through to the broader economy is central banks. If they do nothing, and we see rising unemployment and consumers spending less, then we could be in trouble.

“It’s worth nothing how utterly silent politicians have been. Once again, central banks are being hung out to dry.”

Analysts said that it would take a global response to trigger a change in sentiment, of the kind that markets have begun to expect from central banks. “Watch out for the G20 finance ministers and central bank governors’ meeting on February 26 and 27 in China,” said Danske Bank.


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