For the past few months, life has been dull but straightforward for the world's central bankers. But that is all about to change as shifts in macroeconomic activity force a more proactive style, explains Mark Gilbert, columnist for Bloomberg News
Europe's Jean-Claude Trichet, Japan's Toshihiko Fukui, the UK's Mervyn King and Alan Greenspan of the US have all been living on Easy Street, albeit for different reasons.
Trichet, for example, has not had to steer up or down since taking charge of the European Central Bank in November 2003. As an economic coma threatens Europe even with the benchmark rate at a six-decade low of 2%, Trichet may have to cut at a time when his instincts say it is time to raise borrowing costs.
He would probably be cutting rates already if he only had to worry about Germany and Italy, which account for half of his $10 trillion domain and endured contracting economies in the fourth quarter. With annual inflation slowing to 1.9% in January, the ECB's 2% target rate is no obstacle. German unemployment at a post-war high is a powerful motivation.
Fourth-quarter growth rates of about 0.8% from France and Spain, the euro region's second and fourth-biggest economies, show the difficulties of picking the right gear for a multispeed grouping of 12 nations. Even with the French economy growing, unemployment jumped to a five-year high of 10% last month, undermining hopes that the euro area will match or better last year's 2% growth in gross domestic product.
Signs of Life
At the Bank of Japan, Fukui has also presided over unchanged rates since landing the top job in March 2003. As signs of life in Japan's economy drive the Nikkei 225 Stock Average to an eight-month high and push 10-year government bond yields to their highest since November, policy makers are itching to move borrowing costs up from near zero.
Fukui told the Japanese parliament last month that the central bank plans an April review of its policy of making Y30 trillion ($286 billion) to Y35 trillion available to lenders as its life-support system for the banking system. Earlier this week, he said the bank is studying bond yields to see: "If financial markets are excessively factoring in expectations that policy may be maintained for a long time."
Japan's central bankers would love to nudge interest rates higher to prove that efforts to combat deflation have succeeded. With Japanese consumer prices dropping an annual 0.3% in January and 0.2% in December, based on core prices excluding fresh food, their patience will be sorely tested in coming months.
The Pause That Refreshes
King, who has been Bank of England governor since July 2003, has been able to sit on his hands since August. Five increases starting in November 2003 drove the benchmark UK interest rate to 4.75%, the highest among the Group of Seven nations.
The interest rate futures market is anticipating further increases. The rate on the December UK contract has soared to about 5.2% from 4.75% at the start of the year. The central bank raised its forecasts for both growth and consumer prices in its 16 February quarterly inflation report, and said inflation might bust its two-year 2% target.
The minutes of the bank's 10 February decision show that one of the nine policy makers, Paul Tucker, voted to raise rates - the first non-conformist since April 2004. "We need to be pre-emptive to head off trouble at the pass, even at the risk of sometimes taking the wrong decision," said Deputy Governor Rachel Lomax on 24 February.
"Note that the last time anyone dissented from the majority, the bank raised rates by 25 basis points at the next two meetings," says Paul Robinson, a senior interest rate products salesman at Man Group in London.
Even the Fed's Greenspan, the most proactive of the four central bankers, has had an easy time setting policy; feed the world of finance an easy-to-remember catchphrase by repeating the word "measured" every time you can, raise rates by a quarter-point every six weeks or so, and the job is done.
That recipe has taken the Fed funds target rate for overnight loans to 2.5% in six consecutive steps since June - a move ignored by the bond market, where 10-year yields of about 4.4% help ensure that mortgage rates for US consumers and borrowing costs for companies remain low.
The guardians of global monetary policy have succeeded in making it "boring," the long-held wish of King at the Bank of England. Times are about to get a lot more interesting.
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