Running Out Of Steam: Central Banks Are Moving Towards An Era Of Cheaper Money But The Strategy Is Already Failing To Pay Off…

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via thenational.ae:

Easier monetary policy appears to be the strategy of the day but events over the past week have raised some questions about its wisdom, its likely effectiveness and even its purpose.

Indeed, with monetary policy in danger of suffering from diminishing returns it is probably time for fiscal policy to take more of the strain.

Major central banks are clearly moving towards a new era of cheaper money if the European Central Bank’s message last week is anything to go by. The ECB policy meeting on Thursday laid the ground for a comprehensive set of easing measures in September that focuses not only on lower policy rates, but also on additional asset purchases and a review of the central bank’s inflation target and forward guidance.

However, it was also clear from the decision that not everyone on the ECB Council is on board with the promised steps. President Mario Draghi said that “most people” on the governing council “converged on this” response to the economic slowdown but acknowledged that the statement did not have unanimous support.

So, while the ECB is stepping up to “do whatever it takes” to boost inflation, there is also a growing sense that monetary policy might be running out of effectiveness, especially as interest rates in the eurozone are already negative. Comparisons with the Bank of Japan’s lost decade of zero interest rates in the 1990s are increasingly being made. Negative interest rates impact the banking sector’s core business of making spreads on lending and deposits, so it is no surprise to see most banks in the current earnings season warn about a drop in net interest margins.

While the ECB appears intent on going ahead with cutting rates and doing more quantitative easing (QE), its statement also confirmed it is looking into ways to mitigate the impact of negative interest rates for banks including the option of a tiered deposit rate. This, however, may be another source of tension on the council, with some countries believed to be in favour of such an approach and others against.

 

 

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