Ahead of the European Central Bank’s (ECB) meeting on March 10th, Keith Wade, Chief Economist & Strategist at Schroders looks at whether central banks’ powers are waning in their fight against falling inflation.
According to him, ahead of the March ECB meeting, three factors have set the scene for potential further policy easing:
- Lower oil prices
- Fears over global growth
- Lower market based measures of inflation expectations
He mentions that «one may expect similar policy responses of rate cuts or quantitative easing (QE) expansion to not produce vastly different medium term results to what we have seen already, with growth and inflation so far limited in the backdrop of subdued global growth. It is perhaps this thought process that leaves the market questioning what effective policies central banks can enact further.»
Wade says that there is a cchance that we could see, for the first time, a lowering of inflation targets across the globe.
For at least the last decade the general belief within markets is that regardless of the situation, central banks will help limit losses in risk assets by lowering interest rates or introducing QE (also known as the central bank ‘put’ option). This school of thought has been questioned in recent weeks, with further possible policy action available to central banks seemingly limited, at least compared to what was available in the past. «Monetary policy has been kept very loose, yet signs of strong growth and inflation are difficult to see… with lower spot inflation used in setting future wages and prices, thus affecting core inflation. The problem with inflation is the longer it stays low, the more embedded lower long-term inflation expectations become.»
With market-based measures of average inflation in the 6-10 year range falling across many major markets, consumer-based expectations of inflation have also been falling in recent years.
The market had previously nicknamed the ECB President ‘Super’ Mario Draghi after the “shock and awe” asset purchasing programme announced in January 2015. «On March 10th we will find out whether that nickname has been reclaimed after the disappointment of the December meeting,» he concludes.