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World central banks on deflation alert as Swiss cut rate to -0.75% to save their economy

Switzerland stunned global financial markets Thursday, slashing its official interest rate to -0.75% and abandoning its attempts to cap the franc’s exchange rate against the euro, against a broader backdrop of central bank alarm at the slowing world economy.

The Swiss National Bank’s move is nothing short of a revolution in the world of finance: no central bank has ever set its official interest so low. In pushing rates so far into negative territory, it is consciously destroying the value of investments in the franc in an effort to scare off ‘hot money’ that has flooded the country in search of a ‘safe haven’ from turbulent global markets.
Such flows have been the bane of Switzerland since the start of the Eurozone debt crisis in 2010, pushing the franc up to a level that makes life near-impossible for the Swiss economy.
But the SNB’s move is also part of a broader wave of anxiety about deflation in large parts of the world economy, an anxiety that is growing as the collapse in oil prices drives prices relentlessly lower both at the factory gate and on Main St.
China’s producer prices fell for the 34th month in a row in December, dropping 3.3% on the year, while prices for industrial commodities such as iron ore performed even worse than oil last year. Fears for its economy rose again Thursday after data showing banks lent far less than expected in December.
India’s central bank also surprised markets Thursday by cutting its official interest rate by 0.25% to 7.75%, mainly because of the effect of falling energy prices. Analysts there expect further rate cuts to support growth soon.
Central banks usually like to ‘look through’ the impact of changes in commodity prices, which are historically volatile and notoriously difficult to predict. But European Central Bank board member Benoit Coeuré had admitted this week that such a strategy was no longer possible.
“In the current environment, the continuous decline in oil prices increases the danger that people will lose confidence” that the ECB can stop deflation,” Coeuré said in an interview with the German paper Die Welt.



http://fortune.com/2015/01/15/world-central-banks-on-deflation-alert-as-swiss-cut-rate-to-0-75/

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