Af­ter throw­ing in kitchen sink, what’s a cen­tral bank to do?

CBs are nowhere near ready to deal with a re­ces­sion

Kuwait Times - - BUSINESS -

Cen­tral banks strug­gling to lift his­tor­i­cally low in­ter­est rates and rein in stim­u­lus pro­grams may have more on their minds than just get­ting back to nor­mal - they are, by some ac­counts, nowhere near ready to deal with the next re­ces­sion or cri­sis. Start with a then-and-now com­par­i­son. When the global fi­nan­cial sys­tem nearly col­lapsed about a decade ago, the world’s ma­jor cen­tral banks launched a se­ries of ag­gres­sive counter-mea­sures, in­clud­ing tril­lions of dol­lars’ worth of as­set-buy­ing. The global eco­nomics team at Bank of Amer­ica-Merrill Lynch - in a re­port that ar­gues cen­tral banks are not cur­rently ca­pa­ble of re­spond­ing to a new cri­sis - cal­cu­late that from 2006 to 2009 the five ma­jor cen­tral banks cut rates by an av­er­age of about 350 ba­sis point.

Could they do that now? Short an­swer, no. BofAML reck­ons the cur­rent av­er­age nom­i­nal pol­icy rate is just 50 ba­sis points, with the Euro­pean Cen­tral Bank and Bank of Ja­pan in par­tic­u­lar at the bot­tom limit of what they can do.

It is not the first time this con­cern has been raised. The Bank for In­ter­na­tional Set­tle­ments, of­ten called the cen­tral banks’ bank, fired a warn­ing shot two years ago.

“In some ju­ris­dic­tions, mon­e­tary pol­icy is al­ready test­ing its outer lim­its,” it said in its 2014/2015 an­nual re­port. In the same vein, Stephen King, HSBC’s se­nior eco­nomic ad­viser, has noted that in all U.S. re­ces­sions since the 1970s, the bench­mark Fed­eral Re­serve in­ter­est rate has fallen by a min­i­mum of 5 per­cent­age points. It is cur­rently at a range of 1 per­cent to 1.25 per­cent.

Sim­i­larly, cen­tral banks have been buy­ing up the shop since 2008, when the fi­nan­cial cri­sis hit and the Great Re­ces­sion be­gan. Be­tween them, the US, Swiss, Bri­tish, Ja­panese and euro zone cen­tral banks have bal­ance sheets - es­sen­tially cash and as­set hold­ings - to­talling roughly $15 tril­lion. That com­pares with only around $4 tril­lion at the start of 2008. They could and prob­a­bly would ex­pand this in a cri­sis; cen­tral banks have shown great in­no­va­tion in the past. But with the store of as­sets avail­able to buy dwin­dling as a re­sult of the $15 tril­lion, any ex­pan­sion would have to be far broader. Doable, but rel­a­tively un­tried and pos­si­bly po­lit­i­cally dif­fi­cult.

De­spite the huge mon­e­tary largesse, in­fla­tion re­mains low and well be­low tar­get in all ma­jor in­dus­tri­al­ized economies bar Brexit-hit Britain and even there it may be eas­ing back be­cause of the ebbing of base ef­fects from ster­ling’s fall.

This means that cen­tral banks such as the Fed, ECB, Bank of Eng­land and Bank of Ja­pan are all mak­ing noises of vary­ing hawk­ish­ness with­out nec­es­sar­ily hav­ing solved their main prob­lem.

The Fed has al­ready started tight­en­ing and is talk­ing about cut­ting its bal­ance sheet, the Bank of Eng­land is at least think­ing about rais­ing rates, and the ECB is hint­ing at ta­per­ing its as­set­buy­ing. Even the Bank of Ja­pan, or some mem­bers, have been qui­etly re­treat­ing from its rad­i­cal mon­e­tary ex­per­i­ment. Iron­i­cally, it is this de­sire to nor­mal­ize that some econ­o­mists be­lieve is the main risk for global eco­nomic growth and for the next down­turn.

“In the past, some re­ces­sions have been caused by cen­tral banks act­ing too ag­gres­sively,” Sarah Hewin, chief Euro­pean econ­o­mist at Stan­dard Char­tered Bank, said, adding that her firm did not see any sus­tained in­fla­tion pres­sures to ra­tio­nal­ize tight­en­ing. BofAML econ­o­mists Ethan Har­ris and Aditya Bhave go fur­ther, say­ing cen­tral banks should pre­pare for the next re­ces­sion by keep the taps open to over­shoot their in­fla­tion tar­gets, not make do with bump­ing up close to them. In other words, let in­fla­tion spike, then tighten. What then, if a down­turn hits first, be­fore nor­mal­iza­tion of mon­e­tary pol­icy? In­no­va­tion. The idea of “he­li­copter money” has al­ready been floated, in­volv­ing any­thing from di­rect trans­fers to the pri­vate sec­tor to mon­e­tiz­ing gov­ern­ment deficits by di­rect bond sales be­tween gov­ern­ment and cen­tral bank. — AFP


NEW YORK: In this Oct 16, 2014 file photo, a screen at a trad­ing post on the floor of the New York Stock Ex­change is juxtaposed with the Gold­man Sachs booth. Gold­man Sachs, the most Wall Street of Wall Street firms, is push­ing qui­etly into the realm of con­sumer bank­ing.

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