World Economy

Central Bankers on the Move

The Bank of EnglandThe Bank of England

Now that the Bank of England has raised interest rates for the first time in a decade, it is beyond doubt major central banks in industrialized economies are eager to shift away from ultra-easy policy.

But the fact the decision was so contested both in and outside the BoE perhaps reveals more concern about the lack of inflation pressure than about Britain’s clear difficulty in trying to leave the European Union without a concrete plan, Reuters reported.

The majority of those who argued against higher rates in Britain started with the fact above-target inflation is a result of sharply higher import prices due to the tumble in the pound since the June 2016 vote to leave the EU.

A lack of domestic inflation pressure from higher wage deals remains as plain as ever, as does the ongoing lack of inflationary drift from the global economy, where trade is down from boom years but cheap labor remains plentiful.

Among those who carefully follow Britain’s peers in the Group of Seven industrialized economies, notably the United States and those in the eurozone, the lack of inflation is real and striking, corroborated by a recent Reuters poll of over 500 forecasters around the world.

News that Jerome Powell will be taking over as Federal Reserve chair from Janet Yellen does nothing to change the fact core inflation on the central bank’s preferred measure has fallen back to 1.3%. That is where it was the month before the Fed started raising rates nearly two years ago.

Fed monetary policy committee (FOMC) member, Powell, is set to take over when Janet Yellen’s four-year term expires on February 3.

President Donald Trump has said he wants much faster gains in economic growth, and that means ongoing low interest rates, cheap money.

The Bank of Canada has delivered two interest rate hikes this year—the July one more of a surprise than the follow-up in September—but growth has since flat-lined and there’s no sign of core inflation picking up there either.

  More Reason for Hope

Led by President Mario Draghi, the European Central Bank has just skillfully engineered a broad acceptance January as the right time to slash its monthly asset purchases by half to €30 billion. But core inflation is still going nowhere fast.

The ECB even has a “core core” measure it looks at that strips out a litany of pesky components holding inflation down, and even that is not offering much encouragement.

Japan, like the eurozone, is experiencing one of its best economic years in the past two decades, drifting up with the rest of the global economy but also showing impressive domestic performance and more reason for hope for the future.

But its notable, recent improvement in raising wage settlements a bit still does not look like they will bring inflation much higher.

  Interest Rate

The Bank of Japan’s latest meeting had a newcomer arguing for more easing, a crack in the armor that leaves a rather uncomfortable question lingering in the air. If Japan still hasn’t escaped from two lost decades of near-zero pricing power, even after the authorities have thrown the kitchen, bathroom and garage sinks at it, isn’t the logical conclusion that central banks aren’t in control of inflation?

That is the challenge the BoE will have in coming months: persuading anyone who will listen that by raising rates a tiny amount from near-zero to just a little above zero it was instrumental in bringing UK inflation under control.

It is also worth noting that as central bankers change their tune on inflation from tentative to more emphatic hopes for a revival, some very powerful disinflationary forces in the global economy remain.

While labor unions everywhere are pushing for better pay, the most powerful pull for consumers appears to be the search for a good bargain.

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