Global central banks intensified their battle against slowing inflation as the risk of defeat mounts.
The Bank of Canada unexpectedly cut its main interest rate for the first time since 2009 on Wednesday in Ottawa, saying the oil-price shock will drag down inflation. The Bank of Japan expanded and extended a lending program, while two Bank of England policy makers dropped calls for higher interest rates.
With the European Central Bank poised on Thursday to announce it will buy government bonds for the first time, officials around the world are reinforcing or stepping up commitments to keep monetary policy loose. Behind the increased dovishness are fading price pressures, with the International Monetary Fund this week cutting its forecast for inflation in advanced nations almost in half.
“The focus has to be not on the traditional indicia of prudence about resisting inflation and being independent and containing deficits,” former U.S. Treasury Secretary Lawrence Summers said in a Bloomberg Television interview at the World Economic Forum in Davos, Switzerland. “It has to be on providing adequate economic energy, adequate demand.”
The deflationary threat was a hot topic of debate in Davos as delegates discussed just how much more central banks can do and whether the U.S. Federal Reserve will even be able to raise rates this year.
One key measure is inflation expectations for the period from 2020 to 2025, which show the U.S., euro area and Japan are unlikely to achieve their targets for price gains of about 2 percent, Summers said before the Bank of Canada’s decision.
Canada’s central bank cut its rate on overnight loans between commercial banks by a quarter percentage point to 0.75 percent, a decision none of the 22 economists in a Bloomberg News survey predicted. The last reduction was in April 2009.
“The oil price shock increases both downside risks to the inflation profile and financial stability risks,” the Bank of Canada said in a statement. The rate cut is “intended to provide insurance against these risks” and support the adjustments needed to return the economy to full output, it said.
In Tokyo, BOJ Governor Haruhiko Kuroda and colleagues cut their core inflation forecast to 1 percent for the fiscal year starting in April, from 1.7 percent, and maintained a pledge to increase the monetary base at an annual pace of 80 trillion yen ($674 billion). They also said they will boost the main part of a program to support economic growth to 10 trillion yen from 7 trillion yen. Eligibility for a facility aimed at stimulating bank lending was also widened.
Hours later in London, the Bank of England said policy makers Martin Weale and Ian McCafferty this month stopped voting for a rate increase. That left the nine-member Monetary Policy Committee unanimous for the first time since July as it warned U.K. inflation may drop to zero in the first quarter.
Inflation is slowing around the world. Malaysia on Wednesday reported that consumer prices rose 2.7 percent in December from a year earlier, the second-weakest pace in 2014. New Zealand’s fourth-quarter prices increased 0.8 percent from a year earlier, the slowest rate in six periods.
The Bank of Korea will seek an inflation target that is optimal for the economy, Governor Lee Ju Yeol said on Thursday, adding that the possibility of deflation is “limited.”
All that comes before ECB President Mario Draghi dominates the focus of investors betting he will lead the ECB into uncharted territory by announcing full-scale quantitative easing. Consumer prices fell in the euro area by 0.2 percent in December, the first decline since 2009 and way below the ECB’s target of just below 2 percent.
Draghi has proposed spending as much as 1.1 trillion euros ($1.3 trillion) through asset purchases of 50 billion euros a month until December 2016, according to two euro-area central-bank officials. An ECB spokesman declined to comment.
“Mario Draghi is the most important person in the world at the moment,” Douglas Flint, chairman of HSBC Holdings Plc, said in Davos.
Central banks are being forced to keep policies stimulative as inflation weakens worldwide, dragged lower by a 56 percent plunge in the price of oil since June. The IMF this week cut its outlook for consumer-price gains in advanced economies to 1 percent for 2015 from 1.8 percent. That’s half the 2 percent most central banks view as delivering price stability.
At the Fed, officials are starting to reassess their outlook for the economy as global weakness and disappointing data on American consumer spending test their resolve to raise interest rates this year.
San Francisco Fed President John Williams last week said he will trim his U.S. estimate because of slower growth abroad, while Atlanta’s Dennis Lockhart advocated a “cautious” approach to rate increases, saying inflation readings “may be pivotal.” Both vote on monetary policy in 2015 and repeated that rates could be raised in the middle of the year.
The Bank of Canada is only the latest central bank to surprise financial markets recently. The Swiss National Bank last week unexpectedly ended a three-year cap on the franc and the Reserve Bank of India cut rates outside its normal schedule of meetings. Turkey, Denmark and Peru also eased policy in the last week.
“Never, ever listen to a central bank, because they will use you and abuse you,” said Eric Green, head of U.S. economic research at TD Securities USA LLC in New York. “You always anticipate where they have to be.”
Harvard University professor Kenneth Rogoff predicted central banks will at some point succeed.
“It’s like people don’t believe central banks can create inflation anymore,” the former IMF chief economist said in Davos. “My guess is they will be wrong about that, that central banks may take time, but they will figure it out.”