Cen­tral banks brave new words

The Pak Banker - - FRONT PAGE -


FOR four years rich-world cen­tral banks have done their best to re­ju­ve­nate economies with con­ven­tional and un­con­ven­tional mon­e­tary pol­icy. Now, with short-term in­ter­est rates still stuck near zero and their bal­ance-sheets stuffed with government bonds, the cen­tral banks of Amer­ica, Bri­tain and Ja­pan are ex­per­i­ment­ing with a shift in ap­proach: cou­pling mon­e­tary ac­tion with com­mit­ments de­signed to al­ter the pub­lic’s ex­pec­ta­tions of in­ter­est rates, in­fla­tion and the econ­omy. The sense of change is re­in­forced by the prospect of new lead­ers at the Ja­panese and Bri­tish cen­tral banks, and the in­creas­ing promi­nence of sev­eral doves at Amer­ica’s.

A more doveish stance would en­tail tol­er­at­ing higher in­fla­tion, at least tem­po­rar­ily, in pur­suit of higher out­put: a sig­nif­i­cant shift given the pri­macy cen­tral banks have long given to low in­fla­tion. Bond in­vestors have be­gun to price in higher in­fla­tion (see chart). But just how far each cen­tral bank is pre­pared to go is still un­cer­tain.

In Ja­pan, Shinzo Abe, the prime min­is­ter, has used the term “regime change” to de­scribe the Bank of Ja­pan’s (BoJ’s) agree­ment to raise its in­fla­tion tar­get to 2% from 1%, and pur­sue it with un­lim­ited as­set pur- chases. There are ex­pec­ta­tions for even more force­ful ac­tion once Masaaki Shi­rakawa, the cur­rent gov­er­nor, and his two deputies de­part on March 19th. Un­der Mr Shi­rakawa the BoJ bought lots more as­sets, but crit­ics said he un­der­cut the pos­i­tive im­pact by re­peat­edly say­ing they were not enough to end de­fla­tion and by re­strict­ing the ma­tu­rity of bonds the bank bought.

Mr Abe is ex­pected to nom­i­nate Mr Shi­rakawa’s suc­ces­sor by the end of Fe­bru­ary. The three front-run­ners, in as­cend­ing or­der of doveish­ness, are Toshiro Muto, Haruhiko Kuroda and Kazu­masa Iwata. The first two are former fi­nance-min­istry of­fi­cials; Mr Muto and Mr Iwata are former deputy BoJ gov­er­nors. The lat­ter may be Mr Abe’s favoured choice, although Mr Kuroda, head of the Asian Devel­op­ment Bank, is con­sid­ered to have the most global ex­pe­ri­ence. In a re­cent in­ter­view with The Econ­o­mist, he said the bank must do “any­thing and ev­ery­thing” to hit its 2% tar­get.

But putting de­fla­tion-fight­ers at the helm may not over­come the bank’s in­her­ent con­ser­vatism. Min­utes of the bank’s Jan­uary pol­icy-board meet­ing showed some mem­bers had mis­giv­ings about their abil­ity to hit the 2% tar­get. Masamichi Adachi of J.P. Mor­gan says the new lead­ers may fail to de­liver the ag­gres­sive eas­ing that for­eign in­vestors seem to ex­pect.

Mark Car­ney, who will be­come gov­er­nor of the Bank of Eng­land in July, has fu­elled hints of a regime change of his own, say­ing that cen­tral banks should reg­u­larly re­view how they achieve their pol­icy goals and that in ex­cep­tional cir­cum­stances there might be a case for tem­po­rar­ily tar­get­ing nom­i­nal GDP (ie, out­put un­ad­justed for in­fla­tion). But he has yet to en­dorse that as an alternative. At a par­lia­men­tary com­mit­tee on Fe­bru­ary 7th, he in­di­cated sup­port for sim­ply al­low­ing in­fla­tion to stay above tar­get for an ex­tended pe­riod.

Adam Posen, a former mem­ber of the bank’s mon­e­tary-pol­icy com­mit­tee who now heads the Peter­son In­sti­tute for In­ter­na­tional Eco­nom­ics, a think-tank, says Mr Car­ney’s back­ground does not sug­gest a rad­i­cal break. Both the Bank of Eng­land and the Bank of Canada, which Mr Car­ney now heads, tar­get 2% in­fla­tion but al­low tem­po­rary de­vi­a­tions in sup­port of growth. In­fla­tion has run above the BoE’s 2% tar­get for most of the past eight years. At its last meet­ing on Fe­bru­ary 7th the bank’s mon­e­tary-pol­icy com­mit­tee said it may con­tinue to do so for two more years, yet a third of its mem­bers, in­clud­ing Sir Mervyn King, the out­go­ing gov­er­nor, voted for more quan­ti­ta­tive eas­ing, or QE.

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