Central Banks Farewell to Inflation

<p>China and the UK have another thing in common besides today’s decisions to ease monetary policy. Both nations’ inflation rates have fallen by 50% in […]</p>

China and the UK have another thing in common besides today’s decisions to ease monetary policy. Both nations’ inflation rates have fallen by 50% in less than a year. Next week’s release of Chinese June CPI could well match that of the UK’s 2.8% from its current 3.0%.

The law of cycles suggests that both Chinese and UK inflation could fall below 2.0% as early as Q1 2013, further locking central banks into a paradigm of disinflation, and real negative interest rates. It may also be inevitable that the Bank of England will slash its base rate to 0.25% later this year, courtesy of inflation descent and diminishing returns of asset purchases.

Another inevitable reason why China’s inflation rate will have to fall to at least 2.9% next week is to match China’s one-year deposit rate of 2.94%. This avoids the political inconvenience of having a real negative deposit rate. How striking is that? For a nation that was worried with its run-away property market just last year, the transformational shift towards direct policy easing spells out a new set of priorities by Chinese authorities.

Ashraf Laidi Blog

China’s decision to cut its lending and deposit rates by 31-bps to 6.00% and 2.94% respectively reflects the urgency in reducing the cost of funds across the board, which is a far over -reaching mechanism than reducing the reserve requirement ratio, a rate aimed solely at banks’ deposits management.

ECB Remains a Follower and no Leader
Today’s decision by the ECB to cut its main interest rates by 25bps highlights its role as a follower after its failed attempt as a leader in last year’s two rate hikes.

This speaks volumes about the increasingly tenuous global economic realities dislocating long-established ideologies (Frankfurt) with regards to currency preservation and easy money.

With Fed and BoE interest rates having remained unchanged for the longest period in their history, the ECB is now playing catch-up as it explores zero territory for the first time in its history.

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