The world’s central bankers gathered at Jackson Hole last week in the great annual corroboree of the monetary policy clan. Yet while tribal loyalty among central banks is eternal, the varied performance of the big economies is taking them in different directions.
Having moved more or less concertedly towards easing during the global financial crisis, central banks are on the point of dispersing. Their divergent paths partly reflect how much they themselves have achieved over the past six years and partly how much support governments have given to their various economies’ recoveries.
Financial markets were watching Friday's Jackson Hole speech by Janet Yellen, chairwoman of the US Fed, for signals about when, not whether, economic growth in the US would cause the central bank to start raising interest rates. (Answer: not clear.)
Meanwhile Mario Draghi, her counterpart at the European Central Bank, had to promise anxious investors that the ECB would ease more if necessary.
In the US, the willingness to run rapidly through the monetary policy armoury, up to and including the heavy artillery of quantitative easing, has helped support a recovery that had gross domestic product surpass its pre-crisis peak in 2011. In the UK, a similar adoption of QE helped offset the effect of the crisis and restore growth: some members of the Bank of England's Monetary Policy Committee are already calling for higher rates.
Sluggish ECB
The contrast with the euro zone is increasingly striking. The ECB was one of the first central banks to recognise the need to inject emergency liquidity into the financial system after the crisis hit in 2008. But its approach to the euro zone sovereign debt crisis since 2010 has been half-hearted and dilatory, waiting two years before promising “whatever it takes” to prevent widespread default and possibly even the collapse of the currency. Thus far it has resisted the very obvious case for QE.
The euro zone is sliding towards deflation and its main economies stalling, yet the ECB continues to ask for more time to study the effect of purchasing assets outright. Its failure to act earlier means it will have to do more later. It is quite possible that the Fed’s planned exit from QE in October will coincide with the ECB being forced to start.
Fiscal policy has only exacerbated the international divergence. The US in particular has benefited from the fact that, notwithstanding congressional stand-offs over the debt ceiling, fiscal policy has rightly been supportive of growth. Even in the UK, which made a great deal of the need for austerity, the government wisely delayed its planned fiscal tightening in response to disappointing output.
Austerity measures
By contrast, as Mr Draghi finally got around to complaining about on Friday, euro-zone fiscal policy wrongly still insists on tightening across the board. The austerity measures of the peripheral crisis-hit countries are not offset by deficits in Germany, creating headwinds to growth and making QE even more pressing. A similar situation may be developing in Japan, where, in the light of a weak economy, the government needs to look hard at its plan to go ahead with a second rise in the consumption tax. Otherwise, the Bank of Japan may be forced into further easing.
Even more pitiable are the positions of central banks in emerging markets such as Turkey, South Africa and Brazil. Chronic – rather than countercyclical – fiscal and current account deficits have forced them to raise interest rates even as growth rates have stayed constant or fallen.
By the time central bankers gather again in Wyoming next year, they will most likely have even more disparate tales to tell. Those being forced towards easing would do well to listen to those with the choice to tighten. – (Copyright The Financial Times Limited 2014)
