There is discomfort in the markets about the actions of the central banks, with some fearing that actions currently being taken, or that might be taken in the future, will trigger inflation.
These concerns should certainly not be dismissed, but they also need to be kept in context. In the absence of an economic recovery, and with so much spare capacity (or large output gaps) across economies, it is questionable whether central banks can generate inflation at this stage of the cycle.
Because of this, inflation expectations are still relatively subdued, despite the aggressive monetary easing. In the West, deflation strikes me as a bigger risk than inflation. And judging from recent Federal Reserve Open Market Committee minutes from the US Fed, this is where they see the risks.
This does not mean that there will be deflation — monetary easing will probably prevent it. And just as there is a need for fiscal policy to return to a sustainable level once the economy recovers, there is also a need for monetary policy to return to neutral, although that is some way off.
In the US and the UK, the central banks feel that they have the ability to exit, with a new financing program in the US to issue new Treasury securities and drain excess reserves, and the Bank of England sucking out excess liquidity by selling assets it has bought or by issuing new bank bills.
Across the emerging world, inflation risk needs to be assessed case by case, although in many countries it is not an immediate problem. Once there is a recovery, the reaction of commodity and energy prices will have an important bearing, as it did last year — and that may be the channel through which inflation appears.
Overall, the policy response has been impressive, but there is a way to go. Across Asia there is scope for further monetary and fiscal easing, while in the West, further fiscal stimulus cannot be ruled out, though the focus may be on unconventional policy.
Gerard Lyons is chief economist at Standard Chartered.
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