Central banks’ decisions less effective, still central

Over the last week, the ECB, the BOJ and the Fed have taken decisions which caused mixed reactions on the financial markets. For each decision taken on Wednesday, Tuesday and Wednesday respectively, Mr. Market appeared “directionless”, meaning that he was likely more disappointed than encouraged by central banks’ latest moves – or absence of moves.

ECB’s Mario Draghi said he wouldn’t cut interest rates further in the near future. BOJ’s Haruhiko Kuroda kept Japan’s monetary policy unchanged. Fed’s Janet Yellen reduced rate hikes to 2 moves in 2016 instead of 4 but announced the remaining 2 would take place in 2017. Simply put, central banks whose decisions have become the most directional event for stock exchanges have chosen to pause in the midst of growing doubts as for the effectiveness of massive quantitative easing (QE) with a view to increasing inflation and helping to fuel growth in real economy.

From central bankers’ viewpoint, however, this is the lack of structural and fiscal reforms which has prevented advanced economies from generating more inflation and more growth. Meanwhile the risk of deflation – inflation’s expected to stay negative for several months in the Eurozone – remains a looming threat.