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The three chilling charts keeping central bankers up at night - TELEGRAPH

OCTOBER 12, 2019

BY  Tom Rees


Who would be a central banker in the post-financial crisis world?

After single-handedly dragging the economy out of one mess, rate-setters around the globe have the thankless task of battling new threats, ranging from credit bubbles to deflation.

The Think Tank has selected the three most terrifying charts that are keeping central bankers up at night as gloom descends on the economy once again.

1. Will Europe catch the Japanese deflation disease?

Brexiteers aren't the only ones counting down the days to October 31. ECB president Mario Draghi will leave at the end of the month after throwing the kitchen sink at the eurozone economy.

Top of successor Christine Lagarde's to-do list is reviving the economy's inflation prospects as investors lose faith in the ECB's ability to stop a gradual slide into deflation.

Inflation expectations in the eurozone havetumbled to record lows in 2019



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5-year 5-year inflation expectation rate(pc)

Inflation expectations in the eurozone havetumbled to record lows in 2019

Eurozone inflation expectationsJan '19Jul '19Apr '19Oct '1911.21.41.61.8Bloomberg

The so-called "5y-5y" inflation expectation rate shows investors' longer-term estimates of inflation over a five-year period starting in five years' time, from 2024 to 2029. But it has plummeted to record lows this year.

The huge task facing Lagarde was underlined last week after the consumer price index slipped below 1pc in September for the first time since 2016.

Economists fear that the eurozone will slide into so-called "Japanification", a perilous state of low growth and deflation that has plagued Japan's economy since the 1990s. Deflation is economic kryptonite and can quickly lead to a negative feedback loop of falling prices and sinking demand.


2. Worries mount over risky 2008-style lending

No market invokes the eerie memories of the the subprime mortgage crisis like leveraged loans. Some policymakers fear that "Global Financial Crisis II" could be a big and bombastic sequel to the first.

This junk debt market, which is vital to funding the most indebted companies and private equity deals, is colossal and central bankers around the world have sounded the alarm repeatedly as the next recession draws closer.

Earlier this year, the Bank of England estimated that the market is worth a whopping $2.2 trillion, equating to almost a tenth of the corporate credit held in advanced economies.

By way of comparison, the US subprime mortgage market that blew up in the global economy's face a decade ago was around $1.3 trillion but represented a higher proportion of its respective market at 13pc.

This risky debt has been packaged up and sold on to investors to make sure everyone can get in on the action. Sound familiar?

Mark Carney warned earlier this year that leveraged loans have "all the hallmarks" of the subprime bubble and the Bank of England estimates that global banks account for more than half of the financial system's exposure.

3. Policymakers are navigating choppy waters with little ammunition

Trade wars. Brexit. Germany factories. Stuttering China. Hong Kong. Iran. Whatever Trump decides next he doesn't like.

Central banks are undoubtedly navigating choppy waters as geopolitics threatens to tip the slowing global economy into recession.

The New York Fed's recession probability gauge, which is based on the US government bond market, is flashing red, surging to levels last seen in the run-up to the financial crisis.

This week's minutes from the Bank's Financial Policy Committee meeting was packed with a slew of risks lurking beneath the surface.

Open-ended funds and Facebook's cryptocurrency Libra pose new challenges in terms of regulation while tariff tensions and Brexit threaten to up-end the global trade system and start to reverse globalisation. 

Central banks are heading into a potential downturn with depleted war chests and some economists worry that a lacklustre response to the next recession could erode their independence.

The problem for central bankers is the risk you don't see is always the most dangerous. Who would want their job?


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