Seven Central Banks Take Anti-Deflationary Actions in Past Week

By Pam Martens and Russ Martens: January 22, 2015

Mario Draghi Speaking at the Press Conference on QE, January 22, 2015

Mario Draghi Speaking at the Press Conference on QE, January 22, 2015

The big story this week has not been news coming out of the widely covered World Economic Forum in Davos or the much anticipated bond-buying program in Europe known as QE. The big story is the sheer number of central banks moving into panic mode in the span of a week.

We may be forced to change the name of our web site to “Central Banks On Parade.” Since last Thursday, seven separate central banks have taken action to guard against deflationary forces now moving like an out of control wildfire around the globe. Central bank moves in Switzerland, Canada, Denmark and Peru came as a surprise to markets and may have had a secondary agenda of drawing some blood from speculators.

The most heavily anticipated announcement came today from Mario Draghi, President of the European Central Bank. At 2:30 p.m. Central European Time today, Draghi announced that the central bank will expand its current program of purchasing asset-backed securities and covered bonds by including the purchase of sovereign debt from its Eurozone members. The program will run from this March until September of 2016 with 60 billion euros in bonds being purchased each month. 

Yesterday, Canada’s central bank, the Bank of Canada, shocked markets by announcing it is lowering its target overnight rate by one-quarter of one percentage point to 3/4 percent. The central bank said the move comes in response to “the recent sharp drop in oil prices.” In a statement released at the time of the announcement, the bank stated:

“Business investment in the energy-producing sector will decline. Canada’s weaker terms of trade will have an adverse impact on incomes and wealth, reducing domestic demand growth. Although there is considerable uncertainty around the outlook, the Bank is projecting real GDP growth will slow to about 1 1/2 per cent and the output gap to widen in the first half of 2015…The Bank expects Canada’s economy to gradually strengthen in the second half of this year, with real GDP growth averaging 2.1 per cent in 2015 and 2.4 per cent in 2016.”

The Danish National Bank cut its deposit rate deeper into negative territory on Monday as speculators pour into the currency (Krone) in the belief that Denmark will have to abandon its peg to the Euro, following the same move by Switzerland last Thursday. Central banks can spend billions of dollars attempting to maintain such pegs. If the costs become too exorbitant as speculators pile in, the peg is at risk of abandonment. Monday’s action cut the deposit rate by 15 basis points to minus 0.2.

The Bank of Japan also announced this week that it will extend by a year two loan programs geared toward encouraging banks to broaden lending. One of the programs was increased by 3 trillion yen for a total of 10 trillion yen while eligibility was widened. The BOJ also announced that it will maintain its program of increasing its monetary base at an annual pace of $674 billion. The moves coincided with an announcement that the BOJ is cutting its core inflation forecast from 1.7 percent to 1 percent.

Centrals banks in Turkey and Peru also cut rates in the past seven days. On Tuesday of this week, Turkey’s Monetary Policy Committee cut its benchmark one-week repo rate to 7.75 percent from 8.25 while last week the Central Reserve Bank of Peru cut its reference rate by 25 basis points to 3.25 percent from 3.50, citing weak economic growth and the impact of lower oil prices.

The central bank move that has cost speculators most dearly was last Thursday’s decision by Switzerland’s central bank, the Swiss National Bank, to remove the 1.2 cap on the Swiss Franc’s peg to the Euro and allow the currency to float freely. The action came with no hint of warning and stunned currency markets. Global banks have admitted to losses of at least $400 million with billions more in losses coming at hedge funds and foreign currency brokers.

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