ECB President Mario Draghi on Wednesday dampened expectations that the European Central Bank will announce further stimulus measures anytime soon saying it was “too early to judge”. While Draghi acknowledged the downside risks to Eurozone growth and inflation outlook posed by the recent developments in China and in financial markets, he said more time would be needed to assess their full impact.
The slowdown in China and other emerging economies, the recent appreciation of the euro and falling commodity prices are factors that may delay how quickly inflation would rise to the Bank’s 2% target. But Draghi said that it was too early to decide if these effects would be temporary or not.
Markets were surprised by Draghi’s more cautious stance as other ECB officials in recent days had been quite vocal in saying that the ECB stands ready to act. The US Federal Reserve is another central bank giving out mixed signals as a number of Fed officials have in the past week spoken in favour of raising interest rates some time this year even after Fed Chair Janet Yellen struck a dovish tone at the FOMC meeting on September 17.
Speaking in Columbus on Wednesday, Atlanta Fed President Dennis Lockhart said “there is decent chance that the world is overacting” in reference to the slowdown in China. He said the Chinese economy is slowing to a “very respectable pace of growth” and investors should instead focus on the strength of the US economy, citing the sustained growth and healthy consumption.
Yellen, who is due to speak at the University of Massachusetts on Thursday, will now have to clarify the Fed’s stance so as not to add to the uncertainty and volatility currently prevailing in financial markets. The decision to maintain rates on hold at the September meeting was most likely a precautionary one and Yellen should provide a clearer signal if the Fed intends to begin lift off at the October or December meeting. Any further delay runs the risk of undermining confidence in the worlds’ largest economy.
Another central bank sounding more cautious about the prospects of the global economy has been the Bank of England. The Bank’s Chief Economist, Andy Haldane, suggested that UK interest rates may have to be cut even lower from their current levels. But the consensus is that the BoE will follow the US Fed in raising interest rates as the UK labor market continues to improve.
Deputy Governor Ben Broadbent said on Wednesday that the slack in the UK labor market has narrowed in 2015, which has led to a pick-up in wage growth. He said the large availability of low-skilled workers from immigration and the shortage of high-skilled labor may have attributed to the creation of low skilled jobs and lower productivity. But these factors are likely to fade as both the UK and Eurozone economies continue to expand. A further tightening of the UK labor market would put pressure on the Bank of England not to delay a rate rise.
The dollar has been see-sawing against major currencies since the spring as investors continue to adjust their expectations of a Fed rate hike. Draghi’s remarks on additional QE have sent the euro back above the 1.12 handle against the greenback today, while the dollar has been struggling to hold above 120 yen on Fed uncertainty. The pound has been one of the worst performing currencies this week on recent lacklustre data and dollar strength. Cable hit a 2-week low on Wednesday before recovering slightly to around 1.5265 on Thursday.