Risk of deflation is haunting central banks

In addition to the slowdown of China’s economic growth and the ongoing very low level of oil prices, this is the potential setback of central banks’ monetary policies that is raising growing concerns within the financial sector. From the one hand, the quantitative easing (QE) of the ECB and the BOJ have had more limited effects than expected, especially with a view to generating inflation around 1.8 to 2% annually. “We saw a danger that a continued period of low inflation (…) might destabilize inflation expectations and become persistent,” ECB President Mario Draghi said last week.

From the other hand, the first rate hike in December 2015 by the Fed might eventually deepen the difficulties of emerging markets, particularly China. Moreover, the commodities prices keep on dropping, this way increasing the risk of “negative inflation” Austrian central bank’s governor Ewald Nowotny explained. For a growing number of analysts, only a strong and renewed action from central banks could prevent deflation. Yet, considering the limited effects of QEs, does it mean envisaging one other solution? Which one?