Financial markets have become over reliant on central banks, a leading international body said on Sunday, as investors prepared for the latest announcement on interest rates from the US Federal Reserve.
The Bank for International Settlements, known as the central bankers’ bank, said in its latest quarterly bulletin that the institutions had become over-burdened with the responsibility for tackling a slowdown in growth.
The comments from the the Swiss-based BIS came at the start of a week when the Fed and the Japanese central bank both prepare to update the markets on their latest interest policies.
The Fed is expected to keep interest rates on hold, despite concerns that the strength of the world’s largest economy warrants a rise in borrowing costs.
Analysts on Wall Street said there was little likelihood of an interest rate rise when Fed officials meet on Wednesday, saying there was only a 12% chance of a hike from the current 0.5% rate.
Forecasts of a rate rise in September were downgraded following a 1.1% rise in annual inflation reported in August, up from 0.8% in July. Analysts said the rise in prices was unlikely to have much influence on the Fed, because it was mostly the result of the biggest jump in health costs for 32 years and a modest increase in housing rents, while food and consumer goods prices remained flat.
A decision to freeze rates would bring the Fed into line with the Bank of England and the European Central Bank, which both kept interest rates at historic lows at their September meetings.
As the focus turns to the Fed and the Bank of Japan, which could add further stimulus to its already broad package of measures to cut the cost of credit, Claudio Borio, the head of the BIS’s monetary and economic department, said at the launch of the quarterly bulletin: “It is becoming increasingly evident that central banks have been overburdened for far too long”.
The bulletin outlined how markets had responded since the UK’s vote in June to leave the EU, which prompted the Bank of England to cut rates for the first time in more than seven years to 0.25%. “Through a combination of near zero, or even negative, policy rates, large-scale asset purchases and forward guidance, central banks have been seeking to ease financial conditions in order to boost the economy and, above all, to bring inflation up closer to their numerical objectives,” Borio said.
“Developments in the period under review have highlighted once more just how dependent on central banks markets have become,” he said. Borio also cautioned about their role in the BIS annual report in June.
The Fed, which raised rates from their crisis level of near zero in December 2015, now seems likely to raise rates in December, according to a poll of analysts. It is under pressure to do so from savers who have spent the last eight years locked into zero interest accounts, and from regulators concerned that low interest rates are driving investors to speculate on the world’s stock markets.
The Republican presidential candidate, Donald Trump, has complained that low interests rates are denying savers a return on their pension funds and fostering a speculative stock market bubble.
Marc Ostwald, a strategist at ADM Investor Services International, said the timing of the presidential vote could override other concerns. “A September hike cannot be ruled out completely, above all given the fact that a November meeting hike looks to be off the table, given its proximity to the election,” he said.
The prospect of an interest rate rise in the US has receded after the International Monetary Fund signalled that it would be revising down its July prediction of 3.1% growth for this year when it publishes its World Economic Outlook next month.
Employment figures also showed that the US suffered a lull in job creation last month. There were 151,000 jobs added to the US economy in August, below economists’ forecasts for 180,000 and a marked slowdown after two bumper months of growth.
The Fed has hinted at a rate rise before the end of this year. Its chair, Janet Yellen, said in May that she and fellow policymakers would watch the economic data closely. “It’s appropriate – and I have said this in the past, I think – for the Fed to gradually and cautiously increase our overnight interest rate over time,” she said. “Probably in the coming months such a move would be appropriate.”
