Bloomberg published an article over the weekend that documented central bank actions last week. The ultimate aim of said actions: Keep the accommodation going.
No move was more attention-grabbing than the European Central Bank’s surprise interest-rate cut. Indeed, it was quite bold — rates are close to zero. It runs the risk of stoking concerns that the euro-zone economies are a long way from a recovery.
And that brings me to central bank double-speak …
Going into the ECB meeting, we learned that inflation had slowed. The apparent breathing room in prices suggested central bank policymakers would lace their comments with dovish reassurances. But, in hindsight, they did more than that.
The rationale, according to ECB President Mario Draghi: To tackle “a prolonged period of low inflation.”
Notice what Draghi didn’t say, or tried his hardest not to imply?
He didn’t say deflation. And he didn’t say low growth. No way.
Because he certainly didn’t want to warn of such a potential — two acknowledgements that could easily have sent shockwaves through the financial system and financial markets. Instead, he just said the ECB will remain accommodative, and the inflation numbers prove there is no need to worry about unintended consequences of continued accommodation.
Yes, good. On we go …
Certainly there will be plenty of debate about whether the Federal Reserve will actually taper its bond-buying program and when. But another central bank is surely to slip into the spotlight talking about a “prolonged period of low inflation.” That central bank belongs to Japan. It seems as though pressure for a new, or renewed, accommodation pledge is in the cards. And the Japanese yen just may indicate as much.
I expect the Japanese yen to weaken on growing expectations for new Bank of Japan inflation-generating efforts.
The only thing threatening that call would be a lapse into global deflationary expectations. That’s likely to create a period of broad-market risk aversion, which perhaps would see the yen strengthen on a safe-haven bid.