SAFT ON WEALTH-Central banks are not your friends: James Saft

Wed Jan 21, 2015 4:21pm EST
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(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

Jan 21 (Reuters) - Investors are feeling a rather unfamiliar sentiment towards central banks: betrayed.

Not only have the Indian, Danish and now Canadian central banks surprised with interest rate cuts, the Swiss National Bank confounded expectations last week by abandoning its vow to cap the value of the franc against the euro just days after calling the peg a "cornerstone" of Swiss monetary policy.

It isn't so much that these moves cost people money, because obviously they made different people money as well. Rather it has all eroded the related beliefs that central banks are a) mostly in control of events and b) therefore worthy of being trusted in their promises.

Virtually no economist expected the Bank of Canada to cut rates, as it did to 0.75 percent from 1 percent, because though its economy has been hit hard by the tumble in energy prices, housing prices are in bubble territory and debt is a worry.

"It signals a spectacular loss of nerve that central bankers should always try to eschew, above all when you have a country like Canada with the worst household debt levels in the developed world and an overheated housing market," strategist Marc Ostwald of London-based ADM Investor Services wrote in a note to clients.

"This is symptomatic of the whole mirage of stability that developed world central banks have sought to foster in the post-crisis era starting to unravel in a rather disorderly fashion ... The ECB's task tomorrow looks ever more unenviable!"

Two pieces of advice immediately come to mind for investors feeling newly wary about their central banking friends:   Continued...