Today was the day of easy money. In addition to the ECB announcing the Eurozone’s first stab at quantitative easing, I was able to join some interesting discussions regarding the world’s current monetary easing policies and when and how they might end. Although there were differing views of when the U. S. is likely to raise interest rates, the consensus view was that it was no earlier than the second half of 2015. There are widely held views that there remains limited inflation risk and that the risks remain on the downside with regard to deflation and economic stagnation. With monetary policy having less and less of an impact as interest rates get lower, the risk becomes transmitted to currency exchange rates and the burden of policy adjustment shifts to fiscal policy and economic structural reform.
Throughout the world, inflation seems to be undershooting targets and growth is also less than expected (growth in the UK and the U. S. is okay). All of this is taking place at a time when the markets are becoming less liquid and this is producing more volatility. My sense is that the central banks are less willing to provide liquidity outside of the core banking sector and the private markets need to be sensitive to this fact.
Overall, the slow market growth and the lack of deflationary pressure seems likely to keep interest rates low for some time. So, the markets are addicted to low interest rates and the fear of what happens when they start to rise. Keeping with my places theme this year, this feels like Venice, Italy. Once you are there, you find that you always want more as the architecture, the history, the food and the water combine to create one of the greatest man made places. It becomes incredibly difficult to leave (unless you are there in August).