The great pol­icy di­ver­gence

Financial Mirror (Cyprus) - - FRONT PAGE -

Over the next few weeks, the US Fed­eral Re­serve and the Euro­pean Cen­tral Bank are likely to put in place no­tably dif­fer­ent poli­cies. The Fed is set to raise in­ter­est rates for the first time in al­most ten years. Mean­while, the ECB is in­tro­duc­ing ad­di­tional un­con­ven­tional mea­sures to drive rates in the op­po­site di­rec­tion, even if that means putting fur­ther down­ward pres­sure on some gov­ern­ment bonds that are al­ready trad­ing at neg­a­tive nom­i­nal yields.

In im­ple­ment­ing th­ese poli­cies, both cen­tral banks are pur­su­ing do­mes­tic ob­jec­tives man­dated by their gov­ern­ing leg­is­la­tion. The prob­lem is that there may be few, if any, or­derly mech­a­nisms to man­age the in­ter­na­tional reper­cus­sions of this grow­ing di­ver­gence.

The Fed is re­spond­ing to con­tin­ued in­di­ca­tions of ro­bust job cre­ation in the United States and other signs that the coun­try’s econ­omy is re­cov­er­ing, al­beit mod­er­ately so. Also con­scious of the risk to fi­nan­cial sta­bil­ity if in­ter­est rates re­main at ar­ti­fi­cially low lev­els, the Fed is ex­pected to in­crease them when its pol­icy-set­ting Fed­eral Open Mar­ket Com­mit­tee meets on De­cem­ber 15-16. The move marks a turn­ing point in the Fed’s ap­proach to the econ­omy. In de­cid­ing to raise in­ter­est rates, it will be do­ing more than sim­ply lifting its foot from the fi­nan­cial-stim­u­lus ac­cel­er­a­tor; it will also be tak­ing a no­table step to­ward the mul­ti­year nor­mal­i­sa­tion of its over­all pol­icy stance.

In the mean­time, the ECB is fac­ing a very dif­fer­ent set of eco­nomic con­di­tions, in­clud­ing gen­er­ally slug­gish growth, the risk of de­fla­tion, and wor­ries about the im­pact of the ter­ror­ist at­tacks in Paris on busi­ness and con­sumer con­fi­dence. As a re­sult, the bank’s de­ci­sion-makers are giv­ing se­ri­ous con­sid­er­a­tion to push­ing the dis­count rate fur­ther into neg­a­tive ter­ri­tory and ex­tend­ing its large-scale as­set­pur­chase pro­gramme (oth­er­wise known as quan­ti­ta­tive eas­ing). In other words, the ECB is likely to ex­pand and

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