Author: Anita Hawser, Antonio Guerrero, Gordon Platt


Global Finance presents its annual report on the performance of the world’s central bank governors.

Central bankers know how to pump out liquidity to keep their economies from sinking, but they have not learned how to keep new asset bubbles from forming. As investors search for yield in a low-interest-rate environment, they skate further out on thin ice, taking new risks. No one is sure what will happen when the recent experiments with quantitative easing reach their conclusion, but we will soon find out.

Massive stimulus is ending in the US, with the Federal Reserve winding down its purchases of bonds, although it will continue to keep rates low for some time. Nevertheless, Janet Yellen, the relatively new Fed chair, will ultimately face the consequences of the extraordinary easing of the Ben Bernanke years.

 “The critical challenge for central bankers is trying to gauge how much slack exists in the economy,” says Mike Franklin, chief investment strategist at Beaufort Securities in the UK. “What they conclude will determine when they think it is appropriate to raise short-term interest rates,” he says. “If they underestimate the slack, they will be inclined to raise interest rates too soon and risk the health of the economic recovery. If they wait too long, inflationary pressures could force them to raise interest rates more quickly than their forward guidance commits them to.”

The Bank of England has hinted that it could be getting ready to raise interest rates early next year from a historic low of 0.5%. “In light of the heightened uncertainty about the current degree of slack, the [monetary policy] committee will be placing particular importance on the prospective paths for wages and unit labor costs,” Mark Carney, governor of the Bank of England, says. An anticipated increase in UK wages could be enough to persuade him to act.

While a handful of central bankers in emerging markets are battling high inflation, price rises across most economies remain under control. With global food prices falling and underlying inflationary pressures still low, inflation in emerging markets seems likely to remain subdued, according to economists at Capital Economics in London. “Although core inflation has picked up in Emerging Europe, it is Russia, Ukraine and Turkey that are largely to blame,” the economists say. “GDP growth remains relatively subdued, while a strong and sustained rebound that stokes domestic price pressures looks unlikely.”

One major concern, however, is that a continued rise in foreign exchange reserves by emerging markets central banks could unleash a wave of inflation. Central banks in Asia have amassed huge foreign currency reserves, as a result of buying up dollars to keep their currencies low and their exports competitive on global markets. China’s foreign reserves are nearing a record $4 trillion and account for 80% of the central bank’s assets. The State Administration of Foreign Exchange (SAFE) says the rapid accumulation of reserves is making it more difficult to steer the economy. “The excessively large foreign exchange reserves increase the domestic money supply and create potential domestic inflation pressure,” says Huang Guobo, chief economist of SAFE. Chinese officials are trying to balance the country’s international payments so that reserves don’t continue to increase.

The foreign currency reserves at other central banks in Asia, including those of Hong Kong, Singapore, South Korea and Taiwan, have all set new highs this year. The foreign reserves could help these central banks defend their currencies in the event that foreign capital suddenly flees, as it did in the summer of 2013, when the Fed first announced that it would cut back on its quantitative easing.

Central bankers in emerging markets are trying to cope with the fallout from developed markets’ fiscal and monetary policies and are sounding new alarms about the global economy. Raghuram Rajan, India’s central bank chief, says the lack of coordination between policymakers could trigger another crash in global financial markets. Persistently low interest rates in the West are lowering the cost of capital and distorting investment decisions, he says. Through currency wars and protectionism, countries are trying to push their problems onto their neighbors.

Although central bankers are not elected officials, they should be held accountable for their actions. Global Finance has published Central Banker Report Cards since 1994, grading central bankers of key countries on an “A” to “F” scale. The criteria include such areas as inflation control, economic growth, currency stability and interest-rate management, as well as the determination of central bankers to protect their independence in the face of political interference.                                              
—Gordon Platt


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