Central bankers are firing back at their own central bank.
Janet Yellen and Mario Draghi rebuffed a warning from the Bank for International Settlements that monetary authorities risked raising interest rates “too slowly and too late” to counter emerging asset bubbles.
“Monetary policy faces significant limitations as a tool to promote financial stability,” Yellen, the Federal Reserve chair, said on July 2, three days after the BIS published its advice. So-called macroprudential regulation should have the “primary role,” she said.
Draghi, the European Central Bank president, delivered what he called the “bottom line” the next day. “The first line of defense against financial stability risk should be the macroprudential exercise,” he said. “I don’t think that people would agree with the raising of interest rates now.”
Piling on, Bank of England Deputy Governor Jon Cunliffe said tightening monetary policy to curb asset values risked hurting the economy and so “should be seen as one of the last lines of defense” for stability. The BOE is already seeking to cool its property sector with measures to limit riskier mortgages and prevent an unsustainable buildup of consumer debt.
In Sweden, the Riksbank cut interest rates yesterday by a bigger-than-expected 50 basis points to ward off deflation, noting it is for “other policy areas to manage” rising household debt and housing markets.
“The message from the Fed as well as the ECB and Riksbank this week was that macroprudential policies will address any risks to financial stability while monetary policy remains loose for as long as it take to get a solid recovery and as long as inflation remains low,” Bank of America Corp. strategists said in a report to clients today. “The bottom line is that data, not asset prices, is what we think will drive monetary policies for now.”
It’s not the first time staff at the Basel, Switzerland-based BIS, which is owned by central banks and serves as a counterparty for them, has broken with their bosses. In 2003, BIS economists Claudio Borio and William R. White warned policy makers might need to raise rates to combat asset-price bubbles.
That advice was rejected too.
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