Central banks apparently have no better choice to stimulate the economy than to further ease monetary policies and devaluate their currencies.
Led by the European, Japanese and Chinese central banks, the world is now stepping into another round of monetary easing.
The latest measure by the European Central Bank led to an immediate drop in the euro exchange rate and a rebound in European stock markets.
The move beat market expectations.
Europe’s economic recovery remains fragile and inflation in the region is expected to remain low in view of the depressed oil price.
Data shows inflation in the euro zone dropped to negative 0.2 percent in February.
Meanwhile, the unemployment rate is still at a two-digit level, highlighting the need for eurozone economies to offer more stimulus measures.
However, ECB governor Mario Draghi said he doesn’t plan to further cut the interest rate, and the focus should be placed on other unconventional policy tools.
This means the negative interest rate may come to an end.
The interest rate in the euro zone is already quite low, and the effectiveness of such a policy will become less and less.
Banks are unwilling to lend because they are not too optimistic about the economic outlook. Thus, the real economy has actually taken little advantage of the low interest rate policy.
In Japan, although the central bank has decided to keep the interest rate steady this week, it lowered its expectations for economic growth and the inflation rate.
Japan started adopting the negative interest rate policy in January, but the market didn’t buy it.
The yen exchange rate climbed instead of falling, rising by 6.5 percent against the dollar so far. Corporates are not satisfied with it.
Recent data shows that given the low oil price, Japan’s core inflation rate in January was flat, and far from the 2 percent target set by the central bank.
In the short run, I believe the yen/dollar rate will be bouncing between 112 and 114 to the dollar.
This article appeared in the Hong Kong Economic Journal on March 18.
Translation by Myssie You
[Chinese version 中文版]
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