Many central banks combat risks of deflationCentral banks around the world renewed efforts this week to reflate their economies as slowing prices emerge as a threat to global prosperity.
A day after the European Central Bank unexpectedly halved its benchmark interest rate to a record-low 0.25 percent and Peru cut its main rate for the first time in four years, the Czech central bank yesterday intervened in currency markets. The Reserve Bank of Australia yesterday left open the chance of cheaper borrowing costs by forecasting below-trend economic growth.
“Central banks want to err on the side of keeping policy easier for longer as they don’t see an inflation danger out there,” said Kit Juckes, global strategist at Societe Generale SA in London. “There is a fear of deflation for some and nobody wants to increase the risk of it.”
The need to sustain or reinforce stimulus was demonstrated this week by new estimates from the Organization for Economic Cooperation and Development that showed average inflation across its 34 members slowed in September to an annual rate of 1.5 percent. That’s close to the 1.3 percent of May, which was the softest since the world was plagued by recession in 2009.
“It does look as though inflation is certainly not a concern on the upside anymore,” Robert Sinche, global strategist at Pierpont Securities Holdings LLC in Stamford, Connecticut, said in a radio interview on “Bloomberg Surveillance” on Nov. 5. “Monetary policy around the world is probably going to stay accommodative for a good deal longer.”
Two months after the Federal Reserve delayed pulling back its $85 billion of monthly asset purchases, the ECB on Nov. 7 joined the reflation push with a rate cut aimed at tackling what President Mario Draghi called a “prolonged period of low inflation.”
The reduction was anticipated by just three of 70 economists surveyed by Bloomberg News and came after the euro- area’s inflation rate slid to 0.7 percent in October, the weakest in four years and less than half the ECB’s target of just below 2 percent.
“Weaker-than-expected inflation should unlock lower rates and that’s what happened,” said Richard Barwell, an economist at Royal Bank of Scotland Group Plc in London.
Meantime in Australia, Governor Glenn Stevens and colleagues yesterday forecast below-trend growth and rising unemployment in 2014, three days after leaving their main rate at a record low of 2.5 percent.
The central bank projected gross domestic product will rise by between 2 percent and 3 percent in the year to December 2014, compared with 2.5 percent to 3.5 percent forecast three months ago. The outlook for inflation is “to remain consistent” with the 2 percent to 3 percent target, the RBA said.
Stevens called Australia’s dollar “uncomfortably high,” joining counterparts in bemoaning the strength of exchange rates after the U.S. dollar renewed its decline in recent weeks.
In the Czech Republic, Governor Miroslav Singer went further in pledging yesterday to intervene to weaken the koruna “for as long as needed” to spur inflation. He set a target of “near” 27 per euro, a level last seen in 2009. The Czech National Bank, which has kept its benchmark at 0.05 percent for a year, is fighting off an inflation slowdown that followed 18 months of recession, the longest on record.
Peru’s central bank, led by President Julio Velarde, trimmed its overnight rate a quarter point to 4 percent, surprising all 15 economists surveyed by Bloomberg.
Several central banks want to see their currencies get cheaper to support exports and prices. The Reserve Bank of New Zealand says it may delay rate increases to temper the kiwi, while South Korea has signaled disapproval of a rising won.