The world’s central banks have been as busy as beavers, anxiously looking for ways to trigger inflation and pulling out all the stops to do it. From quantitative easing to zero interest rates and even negative interest rates, policymakers are trying anything and almost everything to repair their nations’ economies.
But are all these actions actually doing anything at all or worse, damaging the very thing they’re supposed to help? Deutsche Bank analysts note that in many cases, as with the Bank of Japan’s recent negative interest rate policy (NIRP) adoption, what central banks do actually causes the opposite of what they wanted to happen. In others, it seems like their policies simply coincided with recovery in the areas they were trying to impact. So is there any point to what the world’s central banks do?
Deutsche Bank Chief Global Strategist Binky Chadha and team call this into question in their February report titled “When Central Bank Actions Have Larger And Opposite Reactions.” They note that some widely held views are that policymakers have run out of ammunition or that they’re just not doing enough to boost their respective economies.
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Bank of Japan impacts stocks, yen
They point to several episodes in which central banks actually create more problems with their policies than what they solve. The most recent example of this is the Bank of Japan, which surprised the markets in January by adopting negative rates. As a result of this move, Japanese stocks rallied, and the yen fell, although briefly.
However, Japanese stocks then tumbled, while the yen “rallied hard,” with stocks falling far below where they were before and the yen soaring much higher than where it was before the bank’s move to a NIRP.
European central bank does more harm than good
The Deutsche Bank team also points to several examples in Europe, as the region’s central bank has been the most active over the last couple of years, instituting four major easing efforts. In June 2014, ECB first moved to negative interest rates, then just months later, it moved further into the negative with rates. In January 2015, the ECB kicked off a round of quantitative easing, and then in December, the central bank did both QE and more negative rates.
Chadha and team note that three of those four easing rounds saw a decline in inflation expectations, which was the bank’s main objective, as measured by the five-year breakeven inflation rate. One came with a pause, while the other two occurred right away. The only time inflation expectations climbed was in January 2015, although even then, inflation breakevens reversed after a short time.
Is QE better than negative interest rates?
The Deutsche Bank team also argues that quantitative easing may be just as bad as negative interest rates, saying that the rise in inflation following the QE round only happened to coincide with oil’s bounce.
Further, the three easings in which inflation fell also brought a tumble in European stocks, meaning that they actually hurt investors’ appetite for risk.
Again, the QE round was the only exception, but there was a series of data surprises already underway at the time, and because the data is reported with a lag, there’s no way the data surprises could have had anything to do with the QE round. Further, the fix was only temporary, and a reversal came.
Another big problem wrought by the European central bank’s move to negative rates in 2014 was the collapse in oil prices, they add, which was precipitated by “the sharpest rise in the trade-weighted US dollar on record over the next 9 months.”
Further, the DB team notes that high yield inflows peaked the same month as investors rotated into HG, and they ask rhetorically why monetary easing would “cause a flight up the credit spectrum.” One reason is that high-yield spreads widen as oil prices fall and because investors expected bond yields to and capital gains to fall, which caused them to move to longer durations.
They add that the ECB didn’t even boost lending because lending had already recovered after the middle of 2012 during the central bank’s “whatever it takes” pledge and now remain at levels where they were before the crisis.
Central banks take cues from each other
What’s perhaps even more troubling is that central banks watch carefully what others do and often follow suit. The U.S. Federal Reserve hasn’t said that negative interest rates are out of the question because they appear to be working in Europe, with the emphasis on “appear,” as the Deutsche Bank team pointed out that in reality, they aren’t working.
Further, the Fed’s round of QE was believed to be successful and also likely drove the recent policies set forth by the ECB and the BoJ. However, there’s little to no evidence that what the Fed did even made a difference.
“The various Fed initiatives all coincided with low points in the data surprise cycle which would have reversed anyway, without any discernable impact on the trajectory of the economic recovery,” Chadha and team wrote. “They also resulted in a large rotation from equities into bonds.”