Central banks in times of uncertainty

This question was reiterated at the sixth annual international NBP conference of the “Future of the European Economy” series.

“Advanced economies remain stuck in a low-growth, low-investment, low-inflation (…) cycle. Putting it simply: growth has been too low, for too long, and benefiting too few”, these words of Christine Lagarde, the IMF Managing Director, were quoted in Warsaw by Kristin Forbes of the Monetary Policy Committee (MPC) of the Bank of England. Everyone agreed with this diagnosis. However, the views on the scale and sustainability of the phenomenon differed.

Forbes herself argued that low inflation is not a global phenomenon, but it concerns “only” Japan and Europe. That is to say that we are not doomed to a decrease in demand in relation to supply forever and that monetary policy is not powerless. Such programs as the Term Funding Scheme of the Bank of England (including GBP100bn in preferential loans for banks) or asset purchases can still be effective. Particularly if they are combined with appropriate macroprudential policy (read more about macroprudential policy).

In other words – these are just temporary shocks with regional variation. Forbes herself did admit that it can also be described as “severe”, since we are coping with the consequences of the global financial crisis, the euro area crisis, debt overhang and low commodity prices. There is no end in sight, but it must be somewhere according to this assumption.

For the time being – as the panel moderator, Márton Nagy, Deputy Governor of Hungary’s central bank, remarked – more than 85 per cent of countries are facing low inflation or even deflation. He added that societies in developed countries are aging and declining, while monetary policy itself can be less effective because of globalization and technological development, which are lowering, e.g. production costs permanently.

The ageing society and struggling with recession have been part of Japan’s everyday life since the early 1990s. These issues were discussed by Sayuri Shirai, a member of the Management Board of the Bank of Japan (BoJ) until March 2016. In her view, Japanese companies are still unable to raise prices permanently despite the fact that combatting inflation intensely began in April 2013. It was then that quantitative and qualitative easing was introduced, and then expanded in October 2014. In January 2016, negative interest rates were added, in July asset purchases were extended by exchange-traded funds (ETFs), and in September followed the decision to influence government bond yields. After an initial success, Japan is still at the starting point as regards the inflation level. This is aggravated by the concern that the BoJ will soon buy up all the bonds, right under the nose of banks and pension funds.

Central bank instruments, mostly in the context of our region, were discussed by Ryszard Kokoszczyński, Member of the Management Board of NBP.

“The inflation target might not be the best invention of humanity since the invention of the wheel, but in the real world with its strict limitations it is functioning relatively well. (…) The problem with its actual alternatives, the nominal GDP target and the price target, is that after taking a closer look at them, I still see the inflation target as the best possible policy,” he said.

The need to use conventional monetary policy instruments in our part of Europe was also stressed by Adam Glapiński, governor of Poland’s central bank Narodowy Bank Polski (NBP). “I must say I miss the times when synonyms of ‘normal’ such as ‘ordinary’, ‘predictable’ or ‘typical’ appeared more often in economic publications. In the good old days of the ‘old normal world’, the mechanisms of fiscal and monetary policy were more effective, and hence more credible,” he said, alluding to the title of this year’s conference: Central Europe’s Growth Perspectives in a “New Normal” World.

Mateusz Morawiecki, Poland’s Deputy Prime Minister, Minister of Development and Finance, added that the countries of our region, at least for now, should keep their national currencies. “Looking at the euro area, we can hear more and more economists say that, contrary to what was said several years ago, this is not the optimal area and that it constitutes part of the problem rather than part of the solution,” said Morawiecki.