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More Central Bank Surprises and Questions

More Central Bank Surprises and Questions

By    |   Friday, 11 March 2016 07:48 AM

Here are the three big surprises on yet another notable day for central banks and markets, and what they may imply for the future:

  • The European Central Bank went beyond expectations by deploying a full range of policy instruments, including a more negative deposit rate and increased asset purchases.
  • After the initial favorable response to the larger-than-expected policy stimulus, asset prices started to sell off, with notable moves in oil and stocks.
  • To make things even more uncomfortable for the ECB, the depreciation of the euro that immediately followed its announcement isn't holding. In a counter-intuitive move, the currency has now strengthened after the central bank's steps.

All this speaks to the consequential issue I discussed in Tuesday's article: That the ECB risks moving closer to the point where unconventional policies are less effective and possibly counterproductive. After all, neither the appreciation of the euro nor the selloff in stocks will help efforts to counter deflation and improve economic conditions.

The potential for surprise isn't limited to the ECB.

Today’s weakening of the dollar against the euro could even encourage the Federal Reserve to be somewhat more hawkish in the guidance it issues after its policy meeting next week.

This raises some unpleasant realities that have yet to be internalized sufficiently. For investors and traders hooked on liquidity, global central banks are becoming less reliable at suppressing financial volatility and boosting asset prices.

What's more, if politicians in Europe and the U.S. continue to falter on fiscal reforms, fail to increase infrastructure spending and decline to strengthen labor markets, central banks could find themselves going from being part of the solution to being part of the problem.

Mohamed El-Erian is the chief economic adviser at Allianz SE. To read more of his blogs, CLICK HERE NOW.

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Here are the three big surprises on yet another notable day for central banks and markets, and what they may imply for the future: The European Central Bank went beyond expectations by deploying a full range of policy instruments, including a more negative deposit rate and...
central bank, surprises, questions, economy
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2016-48-11
Friday, 11 March 2016 07:48 AM
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