Mercury Too High, Rates Too Low

by Brad Tank, CIO, Fixed income, Neuberger Berman

At the World Bank and IMF annual meetings, two concerns dominated: climate change and negative interest rates.

When central banks get behind an idea, you know it’s gathering momentum.

That was a big takeaway for us as we left Washington, DC on October 20 after a busy week at the annual meetings of the Board of Governors of the World Bank Group and the International Monetary Fund.

The ideas gaining traction? One was the importance of climate change and the environment to macro and microprudential policy. Another was the growing pushback against negative interest rates.

Climate Risk at Center Stage

Each year, my colleagues in Emerging Markets Debt lead a sizable Neuberger Berman delegation to the World Bank and IMF meetings. It is a unique opportunity to meet and share ideas with policymakers from the emerging markets, donor countries, development agencies, central and commercial banks, asset managers and asset owners.

Our own contribution to the debate is to host a dinner on Thursday evening, where we present our thinking on a topic we think is likely to feature in the week’s agenda.

This year we focused on environmental, social and governance (ESG) investing. Our Head of ESG Investing, Jonathan Bailey, spoke about the role of investors in tackling climate change, using the United Nations Sustainable Development Goals as a framework for sustainable investing, and the concept of ESG alpha and how to capture it. Global Co-Head of Emerging Markets Debt Rob Drijkoningen, who leads a team with a long track record of ESG analysis, talked about how these factors informed their work on Ukrainian sovereign debt.

It’s clear how sustainability and the environment have been moving up in the news agenda this year. But when we were preparing for this event some months ago, we would never have guessed how these themes would dominate the agenda.

To take just a few examples, there were sessions on the peak in global energy consumption, the importance of forests, the prospects for a Global Green New Deal, the pursuit of the Sustainable Development Goals, the hidden value of biodiversity, and how we might avoid a “Climate Minsky Moment.”

Most notable was the fact that Kristalina Georgieva, in one of her first engagements as the new managing director at the IMF, took center-stage to ask, “Can Central Banks Fight Climate Change?”

Georgieva clearly wants central banks worldwide to put climate and the environment at the heart of monetary policy. But she also emphasized how important this is for microprudential regulation, too—to ensure that those lending mortgages against coastal properties or underwriting loans to coal-fired utilities are taking account of the risks, for example.

‘Orthodoxies’

Central banks are getting onboard with the climate change message. More surprising, perhaps, was the growing criticism we heard them levelling at negative interest rates. Why would central banks question their own policy tool—one of the few they have to meet the challenge of a financial crisis or deep downturn?

The answer, of course, is that the central banks represented at the World Bank and IMF meetings are not those of North America, Europe, Japan and Australia, but those of the emerging world.

Over and over, central bank delegates reminded us of their countries’ huge efforts, following the series of emerging markets crises of the late 1990s, to adopt the “orthodoxies” of the developed world—independent central banks targeting price stability paired with structural reforms. The payoff is the resilient growth, modest inflation and positive real rates we see across most of the emerging world today.

The not-so-subtle message was that the developing parts of the world got their act together 20 years ago, but that progress is now threatened by a combination of recklessly extreme monetary policy, and a lack of structural reform and decisive fiscal intervention from their richer neighbors.

Maybe it’s no coincidence that the emerging world is likely to bear much of the impact of climate change, as well as the impact of these fiscal and monetary policy failures. These concerns have been growing for some time. But when the gray suits with their hands on the central bank policy levers add their voice, it’s long past time for prudent investors to take note.

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