“Three Things I Learned In Washington”: Central Bankers Aren’t Sure What To Believe Anymore

Submitted by Huw van Steenis, senior adviser to the CEO of UBS, and formerly senior adviser to Bank of England Governor Mark Carney.

Three things I learned in Washington

As the world’s central banks and economic policymakers convened in Washington over the weekend for the annual meetings of the IMF, IIF and World Bank, there was a distinct lack of conviction in the air.

“Globally synchronised slowdown”, trade wars, political uncertainty and persistent ultralow interest rates have ground down most investors and policymakers’ belief in the prevailing economic or market narratives.

So the most interesting conversations were about transitions and tail risks. What are the long term implications of negative rates? How disruptive is digital money? And what does the greening of the financial system mean in practice?

Central banks are wrestling with a major challenge: are negative rates starting to do more harm than good? Professor Charles Goodhart of the LSE and I fear we may have already have this “reversal rate” in the Eurozone.

Like steroids, unconventional policy, such as negative rates, can be highly effective in limited dosages but long term usage starts to weaken the skeletal system. Given that negative rates have been in place for over a quarter of the time that the euro has existed, policymakers are starting to worry about the negative consequences — like impaired banking systems and asset bubbles.

I sensed an inflection in the level of concern from two distinct groups: Anglo-Saxon policy makers who simply never want to open the Pandora’s box of negative rates, and European policy makers growing increasingly concerned about the toolkit to break out of the “Japanification” of the eurozone.

What’s more, the penny is dropping that negative rates are hampering the ability of many eurozone banks, aside from the market leaders, to invest confidently in digital technology to serve clients better and fend off the risks from disruptive new entrants. I came away feeling the bar is now incredibly high for any further negative rate cuts.

Second, technology is rapidly changing the way we pay for things. Investors know this well from the huge growth in value of Mastercard, Visa, Paypal and Amex, or new firms like Stripe and Ant Financial.

Little wonder that payments has become the battleground between Big Tech, existing payments firms and banks. The size of the prize can be huge. Alipay and WeChatPay represent 90% of mobile payments in China.

Facebook’s audacious moonshot, Libra, has raised the stakes. Whilst not a single financial boss I met thinks Libra will succeed unless it pivots to a local currency model — think PayTM or Alipay — it has rattled the policy world.

One former central banker highlighted that counterfeiting currency has been a capital offence in many countries over the centuries, and they sounded keen to bring this level of disapproval — if not the actual punishment — to the digital age.

If nothing else, Libra is likely to prompt a flurry of initiatives to improve the plumbing and regulation of payments. But I sensed little appetite for major central banks to create their own blockchain digital currencies — as Fed Governor Brainard argued compellingly, at the Peterson Institute’s “Future of Money” summit.

But the overwhelming theme, if there was one, was the greening of the financial system. Many central banks are following the lead set by Governor Mark Carney that climate change is a legitimate concern for financial regulators.

The transition to a lower-carbon economy will require large scale re-allocation of capital and new investments. Without high quality comparable data, investors, lenders and insurers wont be able to price climate risks and opportunities effectively. That was a key theme of my Future of Finance report.

2019 has been a pivotal year: Japanese firms who have agreed to disclose their climate change footprint according to the standards set by the G20’s Task Force for Climate-related Disclosures (TCFD) have gone from 9 to 199 in just one year. Today four-fifths of the top 1100 companies in the world have now voluntarily signed up.  And pressure will grow in the remainder to report, I heard at the World Economic Forum roundtable.

I see a similar upswing in investor interest. Some two-thirds of new institutional asset management mandates in Europe have sustainable criteria, albeit with massive variation in what clients want.

Taking these new TCFD disclosures and turning them into something decision-useful for portfolios and firms is no small undertaking. And let us be in no doubt, there is a healthy debate about the materiality of these issues amongst policy makers. But this is where the puck is going.

Low conviction meant investors at Washington were largely taking their cue from the late-cycle investing playbook. Seeking to dial up quality across their portfolios and testing the dependability and sustainability of earnings. And thinking about how these transitions and tail risks will play out.