LONDON — While the synchronized global economic expansion is helping get people back into work and forcing interest rates to rise, there is a sense of deja vu brewing about two notable parts of the world.
The European and Japanese central banks are singing similar — and repetitive — policy tunes while facing the same challenges: the best economic growth in years but no sign of rising inflation, and doggedly strong currencies keeping a lid on prices.
The European Central Bank (ECB) said on Thursday it is no longer willing to increase the speed or ferocity of its already-reduced monthly asset purchases program if conditions warrant. But the ECB is still buying €30 billion worth of bonds a month, adding to its more than €2.5-trillion pile each time, with key interest rates still on the floor or negative.
Provided all goes well — and that is not guaranteed — the bond-buying is expected to end sometime late this year, but even then, interest rates won’t likely rise until well into 2019, going by the ECB’s own guidance.
By current expectations, the US Federal Reserve will have raised rates several more times by then, leaving the policy outlook for important central banks overseeing similar consumer-driven economies ever more out of synch.
For its part, the Bank of Japan, which abandoned setting short-term interest rates altogether, is also keeping steady asset purchases that have been in place in various forms for most of nearly 20 years and have greatly intensified recently.
Despite the longest run of economic growth in Japan for 28 years, BoJ Governor Haruhiko Kuroda made clear on Friday that talk in the market of an exit to the program is premature.
All of this raises the question: If not now, when?
Looking at core inflation rates in early 2018 and just about any recent year, an outside observer unfamiliar with the mind-bending sums of asset purchases undertaken via Frankfurt and Tokyo would be forgiven for not noticing anything was happening.
The ECB staff outlook for inflation doesn’t have it nearing its close to but just below two percent target for at least another three years, and the latest Reuters surveys of private sector economists suggest the same.
Indeed, for all of the well-founded optimism around the euro zone’s economic boom since late last year, the ECB is no doubt more worried than it can possibly let on that forward-looking indicators suggest it may already be slowing.
A majority of economists in a Reuters poll taken two weeks ago said the peak of growth momentum in the euro zone was now in the rear-view mirror.
European stock markets, which have been wobbling of late but not far off record highs, seem to carry a whiff of that.
And this leaves aside US President Donald Trump’s decision to levy stiff steel and aluminum tariffs.
The European Union is preparing possible retaliatory measures, and exporters in Asia are also sounding alarm bells.
Once again, it appears that the euro itself may have started to create a feedback loop that most observers of the euro zone economy and ECB policy are all too familiar with.
Taken together with the actual outlook for the currency from foreign exchange dealers — it is set to rise more as the dollar falls — there is cause for concern, or at the least, an inclination to consider if we haven’t been here before.
“While we certainly don’t want to become bearish on the growth outlook, recent data seem to suggest that the acceleration in growth might soon start to level off,” Peter Vanden Houte wrote in ING’s latest global outlook.
“As we pointed out before, sooner or later, the strong euro had to have some impact.”
In the meantime, the Japanese yen has been on a tear against a sinking dollar recently, despite expectations for several Fed rate rises this year.
“All told, the renewed strengthening of the exchange rate provides another stumbling block for the Bank of Japan’s efforts to stoke price pressures,” noted Marcel Thieliant, senior Japan economist at Capital Economics.
“Our view that the Bank will not tighten policy anytime soon is increasingly shared by the analyst consensus: More than 60% of analysts polled by Reuters expect the Bank to leave policy settings unchanged this year.” — Reuters