Professor Charles Goodhart, CBE, on potential short-term paths for policy rates, and his expectation that wage inflation will return as the growth of the global labour force slows.
Professor Charles Goodhart, CBE, a leading global expert on monetary policy, banking and financial regulation, addressed CFA UK members last week on the outlook for policy rates.
Fears about the global economy caused the US Federal Reserve to delay its anticipated rate hike in September and there remains considerable uncertainty about rates in the near and long-term.
Professor Goodhart, who served on the Bank of England’s Monetary Policy Committee from 1997–2000, said he expects the Fed will raise interest rates this month, with the BoE to follow suit in May 2016.
“I think that’s most likely. February’s probably a bit early and the problem with September is that it may coincide with the referendum on whether to leave the EU,” he told CFA UK in an interview before his presentation.
As well as the near-term outlook, Professor Goodhart also shared his views on how long-term demographic changes will affect policy rates and the global economy in the future.
Drawing on a recent Morgan Stanley report which he co-wrote, he argued that a growing “army of the aged” would lead to rising wages, higher inflation and interest rates and falling inequality in the next few decades.
Contrary to a common assumption, he said Japan’s ageing economy provides limited lessons for what will happen when ageing populations affect several countries at once.
As populations age across developed markets and China, global growth will decline he said. But as labour becomes scarcer workers will have more bargaining power and this in turn will fuel higher wages, inflation and interest rates, he predicted.
Central banks will find it more difficult to target inflation he suggested.
“Central bankers thought they were doing a great job at keeping inflation low at 2%. They had it very easy, it was actually China and the growth of workers that was doing it for them.”
Professor Goodhart also said China’s phenomenal growth in recent decades is unlikely to be replicated by another country for a long time.
Although India and African countries could boost the global economy in the coming years, this is unlikely to be enough to counteract the global slowdown caused by ageing populations he argued.
The role of climate change is also unlikely to have much of an impact on ageing populations in the near-term he told CFA UK.
“Climate change issues are very long-term and in the short run it’s very unlikely there will be that much change. In the longer run, climate change is extremely important and probably will eventually be handled by technical innovation,” he said.
The one factor that does have the potential to counteract the projected global growth slowdown is the political arena he suggested.
“In dealing with long run supply side factors, I think political issues are enormously important,” he said.
“Politics actually trumps economics in most cases because what you need for growth is a stable political system which is not corrupt and reasonably good education. If you have that then you will grow, if you don’t then you won’t grow and it really is as simple as that.”