Central Bankers Cave To Market Pressure

It’s getting harder and harder for bankers to buck the market.

Back in September 2014 ECB President Mario Draghi declared “now we are the lower bound” for interest rates and this month Benoit Coeure said that expectations of the ECB were “just too high”. Also, due to pressure from traders for more action,Draghi signaled last week that more stimulus might be coming in December,including a potential cut to the ECB’s already negative deposit rate.

“Things have changed,” he told reporters when asked why rate cuts were back on the agenda.

Markets celebrated their victory, propelling global stocks higher. Equities got a further lift at the end of the week, when the People’s Bank of China cut its benchmark rate for a sixth time in a year.

“Central banks are playing catch up with what the market has known for some time - that global growth is slowing,” said Jason Daw, head of Asia currency strategy at Societe Generale SA in Singapore.

The apparent lesson for investors: Those central banks that have room will keep stimulating and can be prodded to do so. Policy makers are willing to act rather than be later accused of doing too little or giving credence to the mounting arguments that the power of stimulus is waning and that their credibility is at risk.

“While inflation is this low at a global level, central banks will step on the gasagain and elevate asset prices for the foreseeable future,” Deutsche Bank AGstrategist Jim Reid said in a note to clients on Monday. “This leaves huge gap risk lower for financial markets, but that’s more of a problem for when central banks are unable or unwilling to act.”