The European Central Bank’s latest and most dramatic move to stimulate the European economy is another example of a monetary policy that tries to boost growth in one region by taking it from another, says Mohamed El-Erian, chief economic advisor at Allianz and former CEO of PIMCO.
On Thursday, the ECB cut interest rates further, pushing its key deposit rate deeper into negative territory. It also increased asset purchases and announced it will extend those purchases to include and begin a program of cheap loans for banks.
El-Erian said the road that the global economy has been on – stable growth and “repressed financial volatility” maintained by central banks – is ending. “Growth internationally is becoming less stable [and] central banks are either less able … or less willing to repress financial volatility.”
The ECB “wants to devalue its currency,” El-Erian told a gathering of Wall Streeters and journalists at a talk about “America’s Fiscal Future” sponsored by Politico and held at the Nasdaq in New York. “The U.S. did it to promote exports and growth. Now the ECB is trying it” as did Japan and China before, said El-Erian, responding to questions from Politico’s chief economic correspondent, Ben White.
As expected, the euro initially declined following the ECB announcement, but after ECB President Mario Draghi suggested that the central bank wasn’t planning on more rate cuts, the euro reversed course and moved higher.
“We have a dysfunctional global system,” said El-Erian, author of the new book The Only Game In Town: Central Banks, Instability and Avoiding the Next Collapse. “There is competition for limited global growth and there’s no coordination.” He said the ECB was willing probably still able to take more action to stimulate the European economy but was moving closer to becoming ineffective, as the Bank of Japan has, which would be a problem for the global economy.
“You cannot have too many central banks in the Bank of Japan camp,” said El-Erian. “Then you end up with the one policy in place becoming ineffective and then we are in deeper trouble.”
The Federal Reserve is not in the BOJ camp, having reversed its accommodative policy and raising interest rates late last year. El-Erian expects the Fed won’t raise rates again at next week’s policy meeting but will raise rates twice later. He will be looking for the Fed next week to issue “stronger guidance” than what the market expects, suggesting more than one rate hike this year, but will keep options open.