Prior to the start of the US housing market woes, central banks were talking tough on inflation. That was just 6 months ago. Now, with the housing and credit markets deflating, global central banks no longer seem so concerned about rising prices.
The US Federal Reserve has already lowered the cash rate on a number of occasions and this week, Canada's central bank unexpectedly cut rates. The Canadians are obviously feeling the effects of a slowing US economy.
Overnight, the Bank of England reduced official rates by 25 basis points to 5.5%. Their housing market is also under pressure and the financial sector has been rocked by the credit market turmoil. Many believe the BOE will need to cut further.
Over in Europe, the strength of the euro has led many export based industries to call for a rate reduction to take pressure off the euro versus the dollar. In this environment, no one wants a strong currency and some industries operating in the Eurozone are struggling to maintain profits with such a strong currency.
And in Australia, despite a booming economy, the Reserve Bank is still concerned about inflation, but is not prepared to go against the global interest rate trend. Australia would now have one of the highest official cash rates in the developed world.
But in the northern hemisphere, it's all starting to look like competitive currency devaluations. Remember, the Chinese are pegged to the US dollar so weakness in the greenback makes China's currency more ‘competitive'.
The inflation threat may have receded for the time being, but another round of rate reductions by the world's major central banks will only create a bigger inflationary threat a few years down the track.
