Every year much of Davos is about corporate speed-dating. But this year one class of attendee has been emphasising the importance of going slow: the central bankers.
Global stocks slumped yesterday after comments by the heads of the European Central Bank, the Federal Reserve and the Bank of England poured cold water on hopes for interest rate cuts before the summer.
So what? Inflation is proving stickier than anyone predicted. In the UK it rose unexpectedly to 4 per cent in December – the first increase in 10 months – while strong US retail sales data suggests there is still upward pressure on prices in the world’s biggest economy.
Senior economists are warning a wider conflict in the Middle East could scupper plans to bring down the cost of borrowing within the first half of the year. More than one executive told Tortoise the real reason they’ve been in the alps is not to listen to endless hot takes on AI (of which there’ve been plenty), but to gauge how their peers are coping with geopolitical risks.
At an event hosted by Bloomberg, Christine Largarde, President of the ECB, described three critical variables that could jeopardise efforts to reach the bank’s 2 per cent inflation target:
- Wages: Lagarde said there was “a catch up in wage bargaining taking place” and that a decision on cutting rates would come in “late spring” when enough data was available.
- Energy prices: Falling energy costs have been key to driving down inflation, but at the end of last week the price of Brent crude had risen to over $80 a barrel. Biden said he’s “very concerned” about the impact of a wider Middle East conflict on oil prices.
- Bottlenecks: Dozens of Houthi attacks have led to sharp drop in cargo passing through the Red Sea, which normally accounts for 15 per cent of global sea trade. The economist Mohamed El-Erian says this will impact inflation directly and indirectly – by increasing input and goods prices, and delaying the availability of goods.
Lagarde said betting on rate cuts is a distraction. Before this week, markets were pricing in up to six cuts by the Fed in 2024. One former central bank governor told Tortoise it now looked more like three. As for the UK, there’s speculation that there will be just a single rate cut this year.
This is bad news for incumbent political parties on both sides of the Atlantic. Higher-for-longer interest rates give Trump ammunition to call Biden’s economic policies a failure (he’ll be pleased with a tacit endorsement from Jamie Dimon, too).
Tough gig. Central bankers are being accused of groupthink and for playing their own part fuelling market speculation. For governors of the Fed, breaking rank on rate decisions has become “as gauche as wearing tie-dye to a funeral”, says the NYT. The last time one dissented was in 2005.
Last year, the UK’s House of Lords released a report calling for an overhaul of the BofE’s culture, governance and appointments processes, after it showed “complacency” about the threat of inflation in 2021. When much of the financial world is obsessing over how to make better predictions with generative AI, central banks – rightly or wrongly – still rely on human judgements.
Results are in. It’s no wonder both Goldman Sachs and Morgan Stanley have reported their lowest annual profits in four years. High borrowing costs have indirectly weighed on the fees banks make from dealmaking and bond trading. David Solomon, Goldman’s CEO, told analysts talk of rate cuts in the first half of this year had “renewed optimism”. He may be disappointed.
Not all bad. That said, the Davos crowd did cite a few positive trends to watch in 2024. The initial catalyst for Europe’s spike in inflation – constricted gas supplies – has been solved, for now, with imports from Qatar, Norway, the US and Algeria. American productivity is improving, and Chinese growth hit 5 per cent last year. Given that geopolitics could send any of those trends into reverse, slow and steady may be the right call.
