Remember the period Jul 2007 to Jul 2008? Oil was rallying to unprecedented heights and many central bankers were still talking about the inflation threat. When Ben Bernanke started cutting rates aggressively, economists were divided on whether the hawkish ECB was doing a better job when compared to a seemingly rattled Fed at countering inflation. Considering the political sensitivity of the topic in India, the RBI was on inflation high-alert.
All this until we learnt a new phrase "Demand Destruction", suddenly commodity prices plummeted and everyone was talking about the serious risk of deflation, Japan and the lost decade.
Today, govts and central banks are tackling the recession in a 2-pronged manner - Govts announcing major stimulus packages and Central banks keeping short-term interest rates low. The aim for central banks to keep short-term interest rates low is a) to make sure inter-bank lending mkt functions smoothly and b) for this to transmit itself in the form of lower long-term bond yields, as most consumer loans (home and auto) & industrial loans...
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