This week, the Czech central bank became the first to raise rates in the EU since Jean-Claude Trichet’s much lambasted hike in the midst of the sovereign debt crisis of 2011. Of course, the US is already 18-months into a rate increase cycle.
However, the pace has been lethargic as low inflation has persisted despite an economy appearing to be at full capacity. As we have highlighted, something appears to have structurally changed with labour markets; the UK, Japan and the US are all near estimates of full employment, but are producing only modest wage growth.
For Europe, the ECB’s job is, as always, complicated. There is a great divide, with German unemployment at the lowest since reunification (3.8%), but Eurozone wide unemployment still high at 9.3%. This reflects double digit jobless rates in southern Europe (for example 21.7% in Greece and 17.1% in Spain) and for youth (18.9%). Meanwhile, across emerging markets declining inflation is allowing central banks to cut rates (India last week and much of Latin America over recent months).
In aggregate, monetary policy remains extremely accommodative from a global perspective.
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