Flanked by interest rate decisions in Britain, Japan and Australia, the IMF’s annual meeting in Lima takes centre stage this week, with policymakers focusing on China’s economic slide and its impact on the rest of the world.
Activity in China’s vast factory sector shrank again in September, fuelling fears that the economy there may be cooling more rapidly than thought just a few months ago, with a reverberating impact on emerging and developed economies.
Meanwhile, unexpectedly weak US jobs data out on Friday further clouded the global economic picture, and pointed to a much-anticipated rate hike from the Federal Reserve being delayed.
Equity markets worldwide have been falling with Wall Street just recording its worst quarter since 2011, so IMF delegates, primarily central bank governors and finance ministers from around the globe, will seek reassurances from China that it can smooth, if not halt, its slide.
“Driven by fears of a sharp slowdown, they will likely delay the structural adjustments in the coming two years and use the ‘old normal’ approach to support the economy, that is, rely on credit expansion and public investment,” Nordea economist Amy Yuan Zhuang said.
The world’s biggest economy, the United States, is one of the least exposed to China and minutes of the Fed’s September rate meeting, due on Thursday, will give a strong signal of whether a hike, the first in nearly a decade, could still come this year.
Still, some analysts said the minutes could be less hawkish than recent commentary from top officials like Fed chair Janet Yellen or New York Fed president William Dudley, who had said the US was on track to raise rates this year.
The Bank of England, not keen to be the first to hike, will stay put next Thursday and analysts still expect just one rate setter to vote for a rise, leaving the bank on course to make its first move well after the Fed.
In the wake of the US payrolls data, markets pushed back their bets on the timing of the BoE’s first interest rate hike since 2007 by several months to early 2017.
“The fear is that the slowdown everywhere else, in China and emerging markets, is going to spill over into economies that up until now have been doing okay, like the US and the UK,” said John Wraith, head of UK rates strategy at UBS.
Japan appears to be on the brink of a recession and the Bank of Japan’s tankan survey indicates worsening conditions.
Still, the data is not expected to be enough to trigger more stimulus when the bank meets tomorrow and Wednesday.
Instead, the BOJ may wait at least until its late October meeting, when economic forecasts are updated but more likely until early next year, when the impact of the Chinese slowdown is better gauged.
The Reserve Bank of Australia will also keep rates on hold on Tuesday and possibly for all of next year, satisfied that the currency’s slide to its weakest level since mid-2009 has eased conditions enough to soften the impact of the bust following its once-in-a-century mining boom.
“The only scenario we could see the RBA thinking about another policy easing would be a sharp deterioration in the global growth outlook and an accompanying deterioration in the local economy and jobs market,” Commonwealth Bank said in a note to clients.
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