Central banks around the world, especially the European Central Bank (ECB), have done a pretty good job of preventing the downside, but they really have not kicked up the upside with respect to economic growth, said John Silvia, chief economist at Wells Fargo Securities.
Both growth and inflation expectations have been lower over time. There have been contradictions in the ECB’s stance; ECB chief Mario Draghi says at one point in time the ECB would do whatever it takes (to protect the euro), and at his latest press conference he said the central bank is done doing anything with respect to interest rates. Evidently, there’s a contradiction there and there’s a communications problem about what Draghi is really telling people, he noted.
Following Draghi’s statement, the euro strengthened – an outcome that the ECB surely had not hoped for. Similarly, the yen unexpectedly strengthened following the Bank of Japan’s policy announcement. Asked if the market’s losing confidence in the policy path of central banks, John said the markets are sensing that whatever the policy move is at the present time, it’s far less effective than what people might think otherwise, or what the central bankers themselves think.
Clearly the strength in the euro was counter to what the ECB was anticipating as a response to their very aggressive easing. In the Q&A, Draghi reversed himself; he said the ECB would do whatever it takes and announced a big package, following which he abruptly announced the end of it. The markets ran ahead and all of a sudden had to pull back. The response was certainly counter to what the ECB was expecting, he explained.
The ECB has cut the so-called TLTRO rate to zero in its latest policy move. Asked if further low rates would push the banks to give out more loans to businesses and consumers, or is the real problem weak demand for loans, John said given the evidence in the past three years or so, the real issue is the lack of demand for loans.
Central banks can lower rates into negative territory to boost lending by the banks, but nobody’s going to borrow the money if there are no structural reforms and some movement on fiscal policy in the EU to boost the demand side of the economy.
It’s great to have a lot of liquidity out there, but unless there’s demand for the liquidity, the central banks can’t really pump up the economy; that has been the evidence over the last three or four years. Lot of monetary policy easing and lot of liquidity was pumped into the economy, but unless there’s confidence in economic growth, there would not be a lot of demand for those loans, he concluded.
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