Central banks can’t lift inflation, but they can weaken growth

It is clear that central bank’s ability to drive growth and control inflation is waning, with disinflation impacting all major economies given the surge in investment in economic capacity in response to weak growth after the GFC. Despite ultra-accommodative policy settings with zero interest rates in most advanced economies, and QE programs in the US, Japan, Europe and the UK, disinflation and deflationary pressures have clearly had the upper hand in recent years. Indeed, record numbers of OECD countries have inflation below 2% and 1% (see Chart 1) and 14 of the 15 largest advanced economies have inflation below 2% While central banks can’t improve the state of the global economy or increase inflationary pressures, policy mistakes can generate asymmetric risks. In this light, the US Fed would be foolhardy to think it can raise rates without ramping up risk premiums given the current market stress. Cheap monetary policy alone is not our saviour this time around and governments need to address the structural constraints to growth instead of asking others to do it for them. To read more (VIEW LINK)