Daily Column – Accommodative Monetary Policies

Every morning I record a podcast in French (see here) on a specific topic. The text below is the translation of this morning podcast.

Monetary policy management is now more complex than what we expected a few months ago. At this time, the focus was made on US monetary policy and the moment where the Fed would increase its interest rates. We had in mind that the end of asset purchases would be closely related to the rate hike.
The other central banks in developed countries were supposed to adjust their monetary strategy to the environment decided by the US central bank

This is no longer the view we can have now.
Since last June, the ECB shows its ability to put in place a specific monetary policy tailored to Euro Area issues. The strategy was a drop in interest rate to almost 0% (0.05% from September) and measures to provide ample liquidity. This specificity of the ECB monetary policy was highlighted last week when Mario Draghi spoke at the European Parliament and at the European Banking Congress. He said that, if necessary, the ECB could go further with new measures that could improve the economic situation. It was clear that he spoke of a Quantitative Easing on sovereign debt.
Mario Draghi’s target is to reduce imbalances that hurt growth and increase the risk of deflation. Moreover the ECB president wants to limit the risks of a downward drift on long-term inflation expectations.
In other words, he tries to define, with the monetary policy as instrument, a specific trajectory for the Euro Area.

Last Friday, the Central Bank of China has decided to reduce its own interest rates. In an economy that is faltering, the central bank tries to limit constraints on highly indebted companies. But even after the rate drop and due to deflation on producer prices, the companies’ real interest rate are close to 8% which higher than GDP growth. The Chinese central bank must go further to reduce companies’ constraint. It must reduce interest rates again. The central bank wants, by its monetary strategy, to condition the Chinese growth trajectory.

In Japan, the central bank became more accommodative 3 weeks ago. It has increased the amount of assets it can buy every month to Yen 80Tr. This is perceived as the price to change the Japanese economic profile.

This situation is not specific to developed countries. Few weeks ago the Brazilian central bank increased its interest rate (Selic) in order to try to rein its inflation rate.

The strong momentum and great expectations on the world economy that we had a few months ago have been reversed. It is not urgent anymore  for the US or the UK to increase their interest rates.
Mark Carney the Bank of England’s governor has postponed to the end of 2015 a rate hike instead of the end of 2014.
In the USA, the Fed hesitates as economic prospects on the rest of the world are not so strong.

Since the beginning of the crisis, monetary policies have been very accommodative in every developed country. This strategy will not be reversed as soon as it was expected. Global growth is lacking momentum. Taking that into account we cannot exclude that the US monetary policy will remain accommodative longer than expected.

One thought on “Daily Column – Accommodative Monetary Policies

  1. Pingback: Ma chronique – Des Politiques Monétaires Accommodantes | Le Blog de Philippe Waechter

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