Central bank tap-turning risks parching the recovery
Send a link to a friend
[February 23, 2018]
By Jonathan Cable
LONDON (Reuters) - The global recovery has
powered through into the new year, bringing with it expectations for
tighter monetary policy, something that tends to be followed eventually
by recession -- and last time round, financial and economic shock.
Major central banks such as the U.S. Federal Reserve, the Bank of
England and the Bank of Canada have already raised interest rates, while
the European Central Bank is moving ever closer to unwinding its own
ultra-easy monetary policy.
So far, those banks have been reluctant to move rapidly, instead leaving
the monetary taps open to try to drive up stubbornly low inflation and
maintain growth.
"The danger is that we end up stoking bubbles which ultimately have even
more disastrous long-term consequences," said Peter Dixon at Commerzbank.
But if they tighten policy too soon -- or too fast -- they risk choking
off the synchronized global upturn that has delighted policymakers,
politicians, and vast swathes of jobless people who have finally got
back into work.

If the current U.S. economic expansion, already 102 months long, lasts
another two years as many expect, it will be the longest in more than
150 years. (http://www.nber.org/cycles.html)
Already-solid U.S. growth will be lifted this year by tax cuts,
something most economists polled by Reuters say is not warranted at this
late stage of the business cycle.
But it's not just the U.S. economy that is steaming ahead. Dozens of
countries are now enjoying economic growth well above their 10-year
moving averages.
HSBC economists noted in a recent report that periods in which the
majority of countries are expanding at above their long-run trends tend
to be associated with heightened monetary and financial risks.
"Synchronized global growth has tended to occur during only three stages
in each economic cycle: in the initial recovery from recession; the
years immediately preceding the next recession; or ahead of some sort of
financial trauma," they said.
While some individual forecasters have racked up impressive track
records for accuracy, economists as a group consistently fail to predict
recessions.
In a late-January survey, they said the global economy would expand 3.7
percent this year and 3.6 percent in 2019, faster than they expected in
October.
"Global growth has been accelerating since 2016 and all signs point to a
continuous strengthening of that growth, in 2018 and next year," the
IMF's

[to top of second column] |

A police officer keeps watch in front of the U.S. Federal Reserve
building in Washington, DC, U.S. on October 12, 2016. REUTERS/Kevin
Lamarque/Files

Managing Director, Christine Lagarde, told a news conference at January's World
Economic Forum annual meeting in Davos.
Meanwhile, stock markets across the world repeatedly set record highs in 2017
but have had a turbulent start to the year.
"It's hard not to see recent market turmoil as a taste of what's to come as we
enter a world in which central-bank support for asset prices can no longer be
taken for granted," Alliance Bernstein economists told clients.
Some 23 percent of investors believe the biggest tail risk for markets is a
policy mistake by the Federal Reserve or ECB, according to a December survey by
Bank of America-Merrill Lynch.
PUNCH DRUNK
The Fed is almost certain now to raise rates three times in 2018, in line with
the central bank's own projections, a Reuters poll found, even though some U.S.
policymakers are still worried about weak wage inflation and overall price
pressures.
The risks are increasing that it will deliver four hikes.
Polls also found that Britain's Bank of England will increase borrowing costs in
May, earlier than previously thought, and while it will be a long wait before
the ECB raises interest rates, it is expected to end its asset purchases by the
end of the year.
Those predictions for tightening come despite persistently below-target
inflation. Policymakers say those price pressures will come and that robust
growth rates can withstand tighter policy.

Yet who can forget the ECB raising borrowing costs in July 2008, just before the
biggest financial crisis in recent memory and as European growth was already at
a near-standstill, only to be forced into slashing rates months later.
It flip-flopped again in 2011.
The world is different now to how it was then, however, said Commerzbank's
Dixon, with many of the imbalances and problems that afflicted economies
resolved.
"The fact is, you can't continue to run economies on this kind of
ultra-expansionary monetary policy forever. You have to take away the punch bowl
now in order to prevent a bigger hangover later," he said.
(Editing by Catherine Evans)
[© 2018 Thomson Reuters. All rights
reserved.] Copyright 2018 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
Thompson Reuters is solely responsible for this content. |