In­fla­tion elu­sive, cen­tral bankers get­ting twitchy

Kuwait Times - - BUSINESS -

LON­DON: A sig­nif­i­cant pickup in in­fla­tion still re­mains tan­ta­liz­ingly out of reach in most de­vel­oped economies-aside from as­set prices-yet sev­eral cen­tral banks are lean­ing to­ward launch­ing or step­ping up ef­forts that could slow it down. What has shifted in re­cent months is an ac­cep­tance that fis­cal pol­icy, touted around the turn of the year as the es­sen­tial come­back kid af­ter the shock elec­tion of Don­ald Trump as U.S. pres­i­dent, has not yet come back.

Much of this is be­cause of a lack of progress on Trump’s tax cut agenda, dim­ming down what was called the “Trumpfla­tion” trade in fi­nan­cial mar­kets and now even call­ing into ques­tion a mul­ti­year rally in the US dol­lar. But what this does is thrust cen­tral bankers-who only six months ago were said to be wan­ing in in­flu­ence-back into the spotlight.

Many sea­soned cen­tral bank watch­ers say past ex­pe­ri­ence shows that un­til in­fla­tion re­ally ac­cel­er­ates con­vinc­ingly, and for a sus­tained pe­riod for rea­sons other than a rise in the price of oil, the best mon­e­tary pol­icy is to be do­ing noth­ing. The lat­est min­utes from the Fed­eral Open Mar­ket Com­mit­tee’s pol­icy dis­cus­sions show a split over in­fla­tion, which is sure to cast un­usu­ally sharp fo­cus on Fed Chair Janet Yellen’s tes­ti­mony to both houses of Congress in the com­ing week.

In­deed, with the ex­cep­tion of per­sis­tent four-decade-low first-time claims for job­less ben­e­fits, U.S. eco­nomic data has been un­der­cut­ting rel­a­tively mod­est ex­pec­ta­tions for the past sev­eral months, par­tic­u­larly on mea­sures of in­fla­tion. Wage in­fla­tion across most of the de­vel­oped world, widely viewed by econ­o­mists as the most com­pelling and po­tent driver of sus­tained over­all price in­fla­tion, hasn’t picked up the way cen­tral bankers have pre­dicted it would ei­ther.

The Fed, how­ever, re­mains set on fur­ther in­ter­est rate rises, and is now con­tem­plat­ing how and when to start re­duc­ing its $4.5 tril­lion bal­ance sheet, bloated by years of mass as­set pur­chases as stim­u­lus once it had no in­ter­est rate left to cut. “Of course the evo­lu­tion of the eco­nomic data over the next few months re­mains of crit­i­cal im­por­tance,” notes In­vestec’s chief econ­o­mist Philip Shaw. “In par­tic­u­lar, will the mo­men­tum of the econ­omy be main­tained and is the re­cent run of soft in­fla­tion idio­syn­cratic, as most se­nior Fed of­fi­cials seem to be­lieve?”

Worth­while Cana­dian ini­tia­tive ?

It’s not only Yellen who might set the mood in the com­ing week. The Bank of Canada meets to set pol­icy on July 12 fol­low­ing a run-up in the Cana­dian dol­lar, with mar­kets lean­ing to­ward ex­pect­ing the first rate rise in nearly seven years.

The do­mes­tic de­bate is partly over whether a rate rise is now war­ranted in part to tamp down ram­pant ur­ban hous­ing mar­kets-par­tic­u­larly in Vancouver and Toron­toas soar­ing real es­tate prices have pushed Canada’s house­hold debt to in­come ra­tio to near the high­est in the world. Like in other sim­i­lar economies, Canada’s con­sumer price in­fla­tion on its own does not point con­vinc­ingly to a need for the Bank of Canada to de­liver higher in­ter­est rates. “Its de­ci­sion one way or the other could have an ef­fect on mar­kets be­yond its shores as it will be seen as a proxy for pol­icy nor­mal­iza­tion over a wider ju­ris­dic­tion,” notes Shaw.

For some, dis­cus­sion of “nor­mal­i­sa­tion” ap­pears eer­ily sim­i­lar to 2011, when the European Cen­tral Bank, faced with a sim­i­larly shaky-look­ing in­fla­tion out­look, raised in­ter­est rates in what is now re­garded as a mis­take, ar­gu­ing higher rates would be sup­port­ive of busi­ness con­fi­dence. A pun­ish­ing sovereign debt cri­sis fol­lowed and a pe­riod of eye-wa­ter­ingly high un­em­ploy­ment, ush­er­ing in an ex­pan­sion of the cen­tral bank’s bal­ance sheet by well over a tril­lion eu­ros and count­ing, along with neg­a­tive in­ter­est rate pol­icy.

For now, the ECB ap­pears to be mov­ing very gin­gerly to­ward un­veil­ing how and when it will trim back its tens of bil­lions worth of monthly bond pur­chases, but that date is ap­proach­ing. Some of the Bank of Eng­land’s Mon­e­tary Pol­icy Com­mit­tee also now think that now is the time to raise rates-de­spite the un­cer­tainty of Bri­tain start­ing to ne­go­ti­ate its way out of the European Union. They are prompted by a surge in in­fla­tion caused in large part from a plunge in sterling af­ter the Brexit vote.

For now, they re­main in a mi­nor­ity, but the pos­si­bil­ity has sup­ported the pound and mar­kets have been put on no­tice. But a change of mood ap­pears to have taken place at the Bank of Ja­pan, how­ever, which is back­ing off ini­tial at­tempts to sig­nal an im­mi­nent shift away from its ul­tra-easy mon­e­tary pol­icy. On Fri­day it launched a bond-buy­ing bo­nanza, of­fer­ing to snap up unlimited quan­ti­ties in or­der to calm mar­kets. — Reuters

BEI­JING: Peo­ple shop for eggs at a mar­ket yes­ter­day. China’s fac­tory gate prices sta­bi­lized in June af­ter slow­ing for three straight months, of­fi­cial data showed yes­ter­day, but an­a­lysts ex­pect weak­en­ing eco­nomic growth will con­tinue to weigh on in­fla­tion. — AFP

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