LONDON • Global interest rates have peaked. That is the conclusion investors are reaching as the US Federal Reserve and its counterparts in Japan and the euro zone convene for pivotal meetings this week, amid signs that the world economy is ushering in a new period of easier monetary policy.
"We all worry about slow growth," Pacific Investment Management market strategist Tony Crescenzi told Bloomberg Television last Friday. "We would project that interest rates for central banks will stay low for at least the next five years."
What investment firm Pimco has long dubbed the "new normal" is reflected in calculations by JPMorgan Chase economists. Their measure of the average global interest rate reached a high of 2.82 per cent in early February. Having once expected the rate to end the year at 3 per cent, they now see it falling to 2.5 per cent in December, led by cuts from the Fed.
Russia, India, Chile and Australia are among those to have already loosened policy.
Behind the reversal are escalating trade wars, skittish financial markets, weakening demand and soggy inflation. Bloomberg economist Dan Hanson's data shows global growth running at 2.6 per cent in the second quarter, down from 4.7 per cent at the start of last year. Structural trends such as rising debt and ageing populations will also serve to contain borrowing costs.
The key questions for the central bankers are when they should start cutting and how deeply they can actually go as they again seek to rescue economies with less ammunition than they once had and with governments preoccupied by clashes over trade and lacking the willingness to loosen budgets.
Insight will hopefully come on Wednesday when Fed chairman Jerome Powell and his colleagues conclude their latest round of policy discussions. Investors are primed for them to indicate a willingness to cut the US benchmark in the coming months.
There remains division over the outlook. Deutsche Bank sees action next month, while JPMorgan is saying September. Goldman Sachs Group joins Bloomberg Economics and Citigroup in reckoning that the Fed will merely stay steady through this year.