By Bianca Hartge-Hazelman
Many share markets may be riding higher on hopes of European stimulus this week and overlooking plunging oil prices, and even lower global growth targets, but experts say its time that investors woke up to the fact that central bankers aren't doing a great job.
The Australian share market rose 0.7 per cent in early trade on Wednesday joining a global rally on expectations that the European Central Bank will announce a 1 trillion bond buying program to help revive economic growth.
Fears about global growth and falling oil prices are being eased by the ECB's much anticipated announcement of stimulus but market experts are warning investors not to get too excited given last week's shock decision by the Swiss National Bank (SNB) to ditch its currency peg with the Euro.
"Many central banks will envy SNB for its move last week, as they at least try to regain some control of their destiny, but the conclusion remains: as a group, central banks have lost credibility and when the ECB starts QE this week, the beginning of the end for central banks will be well under way," said Saxobank chief economist Steen Jakobsen.
" They (central banks) are running out of time – that's the real real bottom line: SNB ran out of time, ECB runs out of time this week, and Fed/BOJ and BOE ran out of time in 2014.
"What comes now is a new reality – the SNB move was a true paradigm shift – we can no longer look at central banks, the markets and policies of extend-and-pretend in the same light as we did last Wednesday (the day before the SNB move).
Indeed William White, the Swiss-based chairman of the OECD's Review Committee and a former chief economist to the Bank for International Settlements has warned that QE in Europe is doomed to failure at this late stage and may instead draw the region into deeper difficulties. "Sovereign bond yields haven't been so low since the 'Black Plague': how much more bang can you get for your buck?", The UK Telegraph reported.
The euro plunged to an 11-year low against the US dollar after the SNB suddenly abandoning the swiss franc cap last week.
It was a shock because only days earlier the SNB had reaffirmed to the market that the currency floor was an integral part of Swiss monetary policy.
BT Investment Management's head of income and fixed interest Vimal Gor added that faith in central banks has been "broken" after the SNB move and ahead of the ECB's announcement tomorrow.
"It shows that central banks are becoming more and more impotent. It also ultimately proves that central banks cannot drive economic growth like they think they can," he said.
UBS interest rate strategist Andrew Lilley agreed that the reputation of central banks has been damaged.
"The SNB has highlighted to investors the fact that central banks can have inconsistent goals from one-day to another," he said.
Since the 2008 financial crisis, global central banks have embarked on an unprecedented level of bond buying, stimulus, interest rate cutting and financial assistance to help rebuild shattered market confidence and restore economic growth.
They have seemingly done so as independent bodies, but Mr Jakobsen questions if there is now too much political influence.
Many developed countries have tried to anchor an independent central bank to offset pressure from politicians and that's well and good in principle until an economy or the effects of a monetary policy decision beginning spinning out of control. At zero bound for growth and for interest rates, politicians and central banks switch to survival mode, where rules are bent or even broken to fit an agenda of buying more time," he said.