October 2014

In this month's Viewpoint: Low inflation bewitches central banks, The Rocky Horror Euro Show, China: No tricks up their sleeve, no treats on offer, and Views at a glance.

31 October 2014

Keith Wade

Keith Wade

Chief Economist & Strategist

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

Craig Botham

Craig Botham

Emerging Markets Economist

Low inflation bewitches central banks


• Central banks have soothed financial markets with talk of further easing, pushing down interest rate expectations. Low inflation allows policymakers to remain dovish without jeopardising their credibility. Nonetheless, the fall in inflation has been driven by lower commodity prices which in turn reflect supply side developments as much as weaker demand. 
• From this perspective, low inflation should be seen as a support to spending and growth in coming months, rather than a leading indicator of deflation. Faced with an asymmetric trade-off between the consequences of deflation and inflation, policymaker caution is understandable, but low inflation has been a misleading guide in the past and markets will reappraise the path of rates if growth concerns are spirited away.
 
The Rocky Horror Euro Show

• The horror show in Europe continues. Weak growth with a raised risk of recession in the near-term is not helped by very low inflation. Support from monetary policy is ongoing, but fiscal policy continues to make matters worse, despite there being room for the stronger member states to take advantage of near-record low borrowing rates. Hopefully the awakening of the zombie banks can spark the economy back to life in 2015.

China: No tricks up their sleeve, no treats on offer

• China appears to be moving backwards on reforms while President Xi extends his power base. While China should still be able to navigate a property slowdown and potential financial crisis, the political climate makes us gloomier about its long term future.

Views at a glance

• A short summary of our main macro views and where we see the risks to the world economy.

Important Information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.