Macroscope | Investors’ loss of confidence in monetary easing comes at a worrying time for the world economy

In Europe and America, central bankers are divided over the need for loose monetary policy. More importantly, market regard for their ability to boost a flagging economy has fallen dramatically, undermining the effectiveness of such policies

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A view of the Federal Reserve building in Washington. In one of the most important shifts in investor sentiment since the 2008 financial crisis, the expectation of more monetary stimulus is no longer enough to lift stock markets. Photo: AFP

Published: 1:00am, 11 Oct 2019Updated: 4:11am, 11 Oct 2019

There was a time not so long ago when the world’s leading central bankers were perceived by investors and traders as masters of the universe. Not only did they rescue the global economy from the biggest financial crisis since the Great Depression, they managed to get banks lending again and, by flooding the world with cheap money, were responsible for a dramatic and sustained recovery in asset prices.

Yet, over the past couple of years, investors’ confidence in the major central banks’ ability to stimulate growth and drive market valuations higher has waned, to the point where central banks are now seen as part of the problem rather than the solution.

On Monday, the Bank for International Settlements, the so-called central bankers’ bank, published a report that explored the negative side effects of a decade of ultra-loose monetary policy. These include insufficient liquidity and distortions in markets, excessive dependence on central bank funding, pressure on banks’ profit margins stemming from low or negative interest rates and imprudent risk-taking.

Nowhere is the backlash against monetary stimulus more fierce than in the euro zone, where almost 70 per cent of government bonds now trade at negative yields, up from 40 per cent at the start of this year, according to data from Tradeweb.

Germany’s representative on the European Central Bank’s board resigned last month, after the institution resumed its bond-buying programme and cut its deposit rate deeper into negative territory. Last week, a group of former senior policymakers from the ECB launched a scathing attack on the institution.

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.css-1m2rp1p{color:#34b8b5;}Macroscope | Investors’ loss of confidence in monetary easing comes at a worrying time for the world economy

Macroscope | Investors’ loss of confidence in monetary easing comes at a worrying time for the world economy