After slashing interest rates to almost nothing and printing trillions of dollars, central banks are becoming increasingly reliant on another policy weapon: sucker punching markets.
The European Central Bank shocked investors and forecasters last Thursday by cutting its main refinancing rate to a record low, reacting to a shock decline in inflation.
It was the second big central bank surprise in less than two months, after the U.S. Federal Reserve decided in September not to trim its monthly bond purchase stimulus.
And beyond the immediate impact on financial markets, central banks’ shock therapy tactics have also had a lasting effect.
The yield on the U.S. 10-year Treasury bond — one measure of government borrowing costs — fell sharply in the aftermath of the Fed’s decision, and it shows no signs of revisiting September’s peaks for the year any time soon.
The ECB’s rate cut helped weaken the euro more than 1 percent against the dollar, and most economists polled by Reuters reckon it will put the currency on a firmly lower path from here — huge help for the fragile euro zone recovery.
With scant room left to cut interest rates again and appetite for more rounds of money printing waning, economists say surprising markets will increasingly feature in policymaking.
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