The Central Banks are Giving Up

We're seeing the start of central banks abandoning their inflation targets in the hope of keeping countries solvent. It's too little, too late.

The Central Banks are Giving Up
Photo by Joachim Schnürle / Unsplash

It appears that the central bankers have abandoned their 2% inflation targets.

This was predicted on this website last year. The rationale was that governments cannot afford higher interest rates, and the only justification for lowering them was if the inflation target was raised.

It's consistent with the thesis that the government needs inflation to effectively reduce its debts while taking more money from taxpayers.

That's why Canada's central bank cut official rates yesterday. I expect the European Central Bank to do the same in the next few days.

UPDATE: The ECB has just cut rates by 0.25% prior to publication

This could quickly become a trend throughout the Western World.

However, that doesn't necessarily mean interest rates will fall overall. Sure, official numbers will reflect official pronouncements, but the market will ultimately dictate the cost of borrowing money.

Banks need deposits in order to lend, and if the opportunities for returns are better elsewhere, capital will chase the best deal.

For example, how does holding a depreciating currency on deposit to receive a few points in interest compare with holding Bitcoin, now an accepted institutional quality asset class with an average annual return of 40%?

To attract that money, the banks will need to pay up, which means their lending rates could stay well above central bankers' statements.

Australia has a more significant problem than that though.

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