Europe’s Central Banks Echo Fed in Shrugging Off Market Turmoil
Global central bankers aren’t being knocked off their monetary policy paths by this week’s turbulence in stocks.
After investors woke up to the likelihood that officials are serious about pulling back stimulus this year to control inflation, Bank of England Governor Mark Carney declared on Thursday that he may even need to raise interest rates faster than previously thought.
“There will be ups and downs in financial markets,” Carney told reporters in London. “What’s happened in volatility markets is not an entirely surprising development.”
European Central Bank speakers also brushed aside the sell-off by continuing to debate how to end their bond-buying program, which is currently set to run until September.
Policy makers should not “allow ourselves to become unsettled by the decline in equity prices we have just witnessed,” Bundesbank President Jens Weidmann said in Frankfurt.
The European outlooks added an international flavor to the arguments made this week by Federal Reserve policy makers that the market turmoil isn’t enough to force a rethink of their plan to gradually raise U.S. interest rates this year.
While the Standard & Poor’s 500 Index plunged 4.1 percent Monday and has remained jittery since, central bankers contest that equity valuations were probably overdue a correction, and the declines haven’t been deep enough to undermine their economies.
“More volatility in the markets, and maybe addressing some of the excesses and imbalances in the markets, by having a little more volatility, may be a healthy thing,” Fed Bank of Dallas President Robert Kaplan told Bloomberg Television on Thursday.
“I’ll be watching carefully to make sure it does not transmit, though, to tighter financial conditions or spillover to the economy,” he added. “But at this point, I’d be optimistic that it won’t.”
Having already raised interest rates in November for the first time in a decade, the BOE put investors on alert for another increase perhaps as soon as May by lifting its forecasts for economic growth and saying inflation will remain above its 2 percent target.
“It will be likely to be necessary to raise interest rates to a limited degree in a gradual process, but somewhat earlier and to a somewhat greater extent than what we had thought in November,” Carney said. “Domestic inflationary pressures are likely to firm.”
The ECB is for now continuing to pump liquidity into the euro area, despite almost five years of economic growth. Yet Weidmann said in his speech that “if the expansion progresses as currently expected, substantial net purchases beyond the announced amount do not seem to be required.”
His colleague Peter Praet — the ECB’s chief economist — acknowledged the trend, but argued that policy normalization will be a “long, complex” process.
The sanguine stance on markets may extend to Latin America later on Thursday. Mexico’s central bank is expected by economists to raise its benchmark a quarter point to 7.5 percent, continuing a two-year hiking cycle.
Aftershocks from the global stock selloff continued reverberating in markets, with shares falling in Europe and rising in Asia. For UBS Group AG Chairman Axel Weber, a former ECB policy maker, that’s nothing to fear.
“The market has shown an unprecedented level of complacency,” he told Bloomberg Television. “A correction was waiting to happen.”