Global interest rates are likely to go even lower before they rise as financial market volatility and the specter of deflation raise fresh doubts about central banks’ ability to fulfill their mandates, policymakers and economists said.
With markets in turmoil and talk of further Chinese currency devaluation intensifying, expectations for U.S. rate hikes this year have all but evaporated and central banks from Europe to Canada and Australia are preparing the ground for more easing.
Faltering emerging market growth is exacerbating concerns, raising the risk that policy easing in too many places at once will cancel itself out and force national banks into a vicious cycle of competitive currency devaluation.
“The biggest risk for the world economy at this point is an aggressive policy of devaluation in China,” said the head of a major central bank in Europe, who asked not to be named.
“With uncertainty and volatility already high, it would have a big consequence for all economies.”
The People’s Bank of China has been fighting to keep the yuan stable since Jan. 6, when its second sharp depreciation in six months sparked fears of more devaluation as growth in the world’s second biggest economy, already at a 25-year low, slows.