Central Banks Start Printing Presses Worldwide

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As disinflation and deflation threatens growth rates in emerging markets and the European Union, central banks have hinted that their monetary policy will become more accommodative in the coming months.

From China to the European Central Bank, policymakers are cutting growth rates and mulling lowering interest rates and expanding monetary bases in an attempt to get credit to flow more freely around the world.


As disinflation and deflation threatens growth rates in emerging markets and the European Union, central banks have hinted that their monetary policy will become more accommodative in the coming months.

From China to the European Central Bank, policymakers are cutting growth rates and mulling lowering interest rates and expanding monetary bases in an attempt to get credit to flow more freely around the world.

China’s central bank announced late last week that it would cut its benchmark interest rate for the first time in over two years. The People’s Bank of China will lower its one-year deposit and lending rates. The lending rate will fall by 40 basis points to 5.6% and the deposit rate will fall 25 basis points to 2.75%. In a statement, the PBOC said that businesses were having a harder time getting credit to expand operations. “The problem of difficult financing, costly financing remains glaring in the real economy,” said the central bank on Friday last week.

China has seen slowing GDP growth, which fell to 7.7% by the third quarter of 2014. Economists expect China’s GDP to fall below 7% by 2016. To make up for lost growth, Chinese policymakers are trying to promote the renminbi as an international trade currency, which would improve liquidity for Chinese firms. The Chinese Communist Party has arranged meetings with Canada, Russia, and African nations to promote renminbi-based transactions.

The move follows the Bank of Japan’s recent decision to increase the pace of its quantitative easing program, as the BOJ rose its stimulus program’s target from 60-70 trillion yen to 80 trillion yen, or about $682 billion.

European Central Bank Tough on Deflation

While Asian economies look to increase liquidity and with lower interest rates and a higher money supply, European policymakers are considering a similar path. ECB president Mario Draghi said his bank would work to raise inflation at a conference in Frankfurt on Friday. “We will do what we must to raise inflation and inflation expectations as fast as possible, as our price-stability mandate requires,” said Draghi.

Draghi has made several aggressive public statements about the ECB’s focus on disinflation and deflation throughout the Eurozone, both before and after his bank announced it would begin a small bond-buying program similar to the Federal Reserve’s most recent round of QE, which ended in October of this year. Draghi’s position has met with resistance from the German Bundesbank, who has publicly reproached the ECB president on several occasions. 

Bundesbank president Jens Weidmann has argued that the ECB should abstain from widespread purchases of sovereign debt, which he considers a divergence from monetary into fiscal policy, and therefore beyond the ECB’s mandate to curb inflation. Weidmann has argued that structural reforms like fiscal austerity are more important to raise European growth rates. “A prosperous economy needs healthy banks, but the opposite is just as true: healthy banks need a prosperous economy,” Weidmann said.

Most recently, ECB Governing Council member Klaas Knot has said that he is “skeptical” of the efficacy of QE. Some economists interpret this as a sign that the ECB remains divided on the pace of its monetary easing program, but Draghi’s recent comments suggest that he will push for QE despite Bundesbank opposition.

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