Has the Bank of England or its peers run out of options?

  • 16 December 2019
  • 5 minutes

In a November 2019 roundtable, Marcus Brookes, Keith Wade and Jon Wingent took part in a discussion led by David Ryder in which the outlook for 2020 was investigated.

In this extract, we look at central banks and what, if anything, they can do in 2020.

Round table attendee biographies

David Ryder, Senior Investment Writer and Analyst

Schroders Personal Wealth

David has been leading the production of investment commentary at Schroders Personal Wealth (and before that for Lloyds Private Wealth) for more than four years. His 25 years of experience include publishing, broadcasting and journalism across a range of financial and investment topics.

Marcus Brookes, Chief Investment Officer

Schroders Personal Wealth

Prior to his role in Schroders Personal Wealth, Marcus was Head of Multi-Manager at Schroders from 2013 with responsibility for the Schroders multi-manager team and investment process. Marcus has over 25 years’ experience within investment management, specialising in manager selection and asset allocation.

Jon Wingent, Head of Investment Specialists

Schroders Personal Wealth

Jon Wingent has been Head of Investment Specialists since September 2016. Jon heads the investment specialist which supports colleagues and clients with subject matter expertise on investment related matters. Before joining us, Jon was an investment director at Close Brothers Asset Management. He has 17 years’ experience in the investment management industry.

Keith Wade, Chief Economist

Schroders plc

Keith is responsible for the economics team and the Schroders house view of the world economy. He is a member of the Group Asset Allocation Committee. He joined Schroders in 1988, before which he spent four years as a research officer at London Business School.

DR: Let’s talk about the people who were instrumental in pulling us out of the financial crisis, the central banks. Are they going to be able to do much in the next round of problems?

KW: Interest rates are already very low, so there’s less scope for further interest rate cuts to provide stimulus to borrowing, spending and economic growth.

The US central bank, the Federal Reserve or “Fed”, spent the previous couple of years raising interest rates while growth was strong enough to support that. This gave it scope for stimulus which it has been using in 2019 with three interest rate cuts.

Then there’s quantitative easing or “QE” which is a roundabout way of electronically printing additional money. The Fed and the Bank of England could do more QE, but the European Central Bank, the ECB, which is the central bank for the eurozone, has less scope.

The ECB has already cut interest rates into negative territory. In other words, the commercial and high street banks that place deposits with the ECB are effectively paying interest to the ECB instead of receiving interest on their deposits from the ECB. This makes life difficult for commercial banks, so pushing interest rates even lower would create problems. The ECB’s QE programme is also already close to full capacity. It’s no surprise then, that the ECB’s governor until November 2019, Mario Draghi, urged European governments to step up by increasing their public spending or reducing taxes.

DR: That plea was aimed at specific European countries whose economies have the capacity to cope with higher spending or lower revenues, specifically the French, the Dutch and, most especially, Germans. Marcus, can you see the Germans participating in this so-called fiscal stimulus?

MB: I think it’s unlikely at the moment. The prevailing culture in Germany is to maintain a balanced budget, i.e. government revenues match government spending. Chancellor Merkel has expressed her dislike of it as have the likely candidates to take over when she steps down as Chancellor.

However, the ECB has a new governor in the form of Christine Lagarde. She appears to be adopting much the same monetary policy of Mr. Draghi by providing low interest rates and substantial QE. But she has more political and diplomatic experience, so she might be the right person to persuade the Germans and others to support broader European growth through higher spending or lower taxes. And she didn’t waste any time. Her first speech included an appeal to European governments to increase their spending on a “strategic” basis. In other words, spend more money on things that will support broader economic growth across the region.

In the meantime, if a substantial trade deal can be achieved between China and the US, then that might be enough to spur growth in Germany which would make fiscal stimulus less likely. But if the German economy continues to suffer as a result of the trade impasse, opinions there might change.

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