V. ANAN­THA NAGESWARAN

THE MES­SAGE FROM THE MON­E­TARY POL­ICY WEEK

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Aweek

of cen­tral bank ac­tion is over. In­dia raised the pol­icy rate by 25 ba­sis points for the se­cond time this year and the repo rate is now 6.5%.

The Fed­eral Re­serve did not raise in­ter­est rates but sounded con­fi­dent enough that an­a­lysts are now ex­pect­ing a rate hike in the next meet­ing in Septem­ber.

The Bank of Ja­pan was the first one to meet in the week ended. It made some tweaks to the mon­e­tary pol­icy but noth­ing dra­matic. We will deal with that in a bit.

The Bank of Eng­land (BOE) raised the in­ter­est rate on Thurs­day. Its pol­icy rate now stands at 0.75% and the Fi­nan­cial Times screamed on Fri­day that it is at the high­est level in nine years! Yeah, right. Not sat­is­fied, it wrote an edi­to­rial be­rat­ing the BOE for be­ing “ir­re­spon­si­ble” with a rate hike at the wrong time.

In 2012, the BOE pub­lished a pa­per on the im­pact of as­set pur­chases ( The Distri­bu­tional Ef­fect Of As­set Pur­chases, July 2012).

It ac­knowl­edged that BOE as­set pur­chases, post-2008, had dis­pro­por­tion­ately favoured the wealthy. Be­tween 2009 and 2012, the BOE bought £325 bil­lion worth of as­sets trans­lat­ing into a wealth ef­fect of £600 bil­lion, based on fi­nan­cial mar­ket re­ac­tion (higher prices of cor­po­rate bonds, gilts and stocks).

These wealth ef­fects ac­crue, nat­u­rally, only to those who hold fi­nan- cial as­sets. The pa­per noted, based on a sur­vey cited, that close to 80% of the fi­nan­cial as­sets were held by those above the age of 45 and that the me­dian house­hold only had an av­er­age of £1,500 of gross as­sets.

Fur­ther, the top 5% of the house­holds held an av­er­age of £175,000 of gross as­sets, or around 40% of the fi­nan­cial as­sets of the house­hold sec­tor as a whole.

In April 2018, the Of­fice for Na­tional Sta­tis­tics in the UK re­leased the an­nual na­tion­wide hous­ing af­ford­abil­ity sta­tis­tics (goo.gl/4j2fuq). Three ob­ser­va­tions from the re­port stand out:

• The af­ford­abil­ity ra­tio has more than dou­bled for ev­ery prop­erty type in Eng­land from 1997 to 2017.

• 69 lo­cal au­thor­i­ties in Eng­land and Wales had sig­nif­i­cant dif­fer­ences in the ra­tio of me­dian house prices to me­dian work­place-based an­nual earn­ings over five years, be­tween 2012 and 2017.

• All but five Lon­don bor­oughs saw sig­nif­i­cant wors­en­ing of af­ford­abil­ity since 2012.

BOE mon­e­tary pol­icy had made home­own­ers richer and put homes out of reach of prospec­tive buy­ers, es­pe­cially the lower in­come and younger pop­u­la­tion. Yet, the Fi­nan­cial Times be­rates the BOE for mak­ing a to­ken ad­just­ment to the in­ter­est rate af­ter nine years to 0.75% when the in­fla­tion rate is at around 2.3%. Real rates are still sub­stan­tially neg­a­tive.

In 2016, the BOE pre-emp­tively cut in­ter­est rates af­ter the Brexit vote. How­ever, nei­ther the econ­omy nor as­set prices suf­fered a melt­down in the coun­try. It merely stoked the bub­ble in real es­tate prices fur­ther.

What the BOE did last week was to re­move the need­less in­sur­ance cover it had pro­vided the econ­omy two years ago—a pol­icy that has made as­set-own­ers and cap­i­tal­ists rich. Yet, such a move has come in for crit­i­cism.

A dif­fer­ent prob­lem is play­ing out in Ja­pan. The pledge by the Bank of Ja­pan (BOJ) to tar­get the yield on the 10-year govern­ment bond at 0.0% has made lend­ing an un­prof­itable propo­si­tion for banks.

Net in­ter­est mar­gins have shrunk for many small and re­gional banks. So, many ex­pected the BOJ to raise the yield on the 10-year govern­ment bond that it is tar­get­ing. It did not do so but con­ceded that it would tol­er­ate a higher fluc­tu­a­tion in the bond yield.

Thus, of­fi­cially, the pol­icy re­mained un­changed. De­spite all these years of pow­er­ful and per­sis­tent qual­i­ta­tive and quan­ti­ta­tive eas­ing in Ja­pan, the in­fla­tion tar­get of 2% re­mains as elu­sive as ever. BOJ con­fessed: “Prices have con­tin­ued to show rel­a­tively weak de­vel­op­ments com­pared to the eco­nomic and em­ploy­ment con­di­tions…and it is likely to take more time than ex­pected to achieve the price sta­bil­ity tar­get of 2%.”

It is even pos­si­ble to ques­tion if the ap­pro­pri­ate price sta­bil­ity tar­get for a pop­u­la­tion with neg­a­tive de­mo­graphic im­pulses and po­ten­tial growth of 0.0% is some­thing lower than 2%.

In sum, the mes­sage from the week of ac­tiv­ity by cen­tral banks in the spot­light is that it is far eas­ier for cen­tral bankers to cut pol­icy rates than to raise them.

Pub­lic dis­course will not let them do it un­til it is too late—that is, un­til many signs of over­heat­ing stare them in the face. By then, it will be im­pos­si­ble to stop the in­evitable eco­nomic re­ces­sion and as­set price cor­rec­tion. Mon­e­tary pol­icy tight­en­ing will be blamed for pre­cip­i­tat­ing them. The loose mon­e­tary pol­icy that pre­cip­i­tated the over­heat­ing will not be blamed. To com­pen­sate, cen­tral banks will now ease ag­gres­sively again! The race to the bot­tom for in­ter­est rates and for in­tel­li­gent pol­i­cy­mak­ing will con­tinue.

This is mod­ern mon­e­tary pol­icy in a nut­shell. Against the back­drop of this model, what the Re­serve Bank of In­dia (RBI) did—a po­ten­tial pre-emp­tive tight­en­ing—has to be given more credit than it has re­ceived.

Fi­nally, let us praise the Bank of Brazil for the lu­cid English trans­la­tion of its brief and clear mon­e­tary pol­icy state­ment af­ter its meet­ing on 2 Au­gust. RBI may do well to re­flect on its brevity, sim­plic­ity and clar­ity.

V. Anan­tha Nageswaran is an in­de­pen­dent con­sul­tant based in Sin­ga­pore. He blogs reg­u­larly at The­gold­stan­dard­site.word­press.com.

Com­ments are wel­come at baretalk@livemint.com

What RBI did—a po­ten­tial pre­emp­tive tight­en­ing— has to be given more credit than it has got

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