Central bankers from Japan and the U.K. predicted their new campaigns to encourage expansion will work, sustaining support for global growth even as the Federal Reserve considers a reduction in stimulus.
As the annual gathering of central bankers and economists in Jackson Hole, Wyoming, drew to a close yesterday, Bank of Japan Governor Haruhiko Kuroda said his souped-up asset-buying “has started to exert effects” on the world’s third-largest economy.
Bank of England Deputy Governor Charlie Bean said the U.K.’s pledge this month to avoid raising interest rates before unemployment falls to 7 percent should restrain U.K. gilt yields and boost confidence among consumers and companies.
“We don’t think that all central banks will phase out from unconventional monetary policies,” International Monetary Fund Managing Director Christine Lagarde told Bloomberg Television’s Sara Eisen. “In Europe and Japan there is a lot more to be done.”
Such sentiments may help offset concerns among emerging markets as Fed officials consider whether to start reducing their $85 billion in monthly bond buying as soon as next month. Buffeted by a recent sell-off in emerging-market stocks and currencies, officials from developing nations, including Mexico’s central bank governor Agustin Carstens, cautioned the symposium about unintended harm from advanced nations’ monetary policies.
The European Central Bank cannot “rule out” cutting its benchmark interest rate to a new record low even amid signs the euro-area economy is on the mend, said Governing Council member Panicos Demetriades.
“That option is still on the cards,” he said in an interview. “We cannot rule out that possibility although one has to take a look at the new data. That data is more encouraging.”
Emerging-market stocks have lost more than $1 trillion in market value since May, when Chairman Ben S. Bernanke testified to Congress that the Fed “could take a step down” in its bond purchases, according to data compiled by Bloomberg. Such buying helped channel $3.9 trillion in capital flows to developing nations in the past four years.
The MSCI Emerging Markets Index has fallen 12 percent this year, compared with a 13 percent gain for MSCI’s gauge of shares in advanced economies. The 20 most-traded currencies among emerging economies have fallen about 4.3 percent in the past three months, data compiled by Bloomberg show.
Japan’s central bank is buying more than 7 trillion yen ($70.9 billion) in bonds each month to expand the monetary base by 60 trillion yen to 70 trillion yen per year. It seeks to generate inflation of 2 percent within two years after 15 years of battling deflationary forces.
Kuroda said the push has helped boost stock prices and restrain bond yields, while supporting bank lending and bolstering confidence among consumers and businesses. Inflation expectations are also picking up, he said.
“We think that at least in the next two years or so we would be able to contain increases in long-term interest rates, so as to maintain low real interest rates,” he said.
Consumer prices rose in June, and the world’s third-biggest economy expanded at an annualized 2.6 percent in the three months through June 30. The benchmark Nikkei 225 Stock Average is up 31 percent this year.
Japan will maintain the strategy “while continuing to make efforts to maintain the stability of the global financial system,” Kuroda said.
Meantime, the Bank of England this month embraced so-called forward guidance by projecting it will keep its benchmark interest rate at 0.5 percent until late 2016 as it waits for the jobless rate to fall from 7.8 percent.
While a run of strengthening economic data has helped push up gilt yields since then, Bean said in Jackson Hole that the unemployment threshold, by serving as a reminder of just how much growth is needed to regain lost ground, should temper the extent of any tightening.
“The knowledge that monetary policy will not be tightened until the U.K.’s fledgling recovery is secured should boost confidence,” Bean said. “Moreover, it should reduce the likelihood that the present expansionary monetary stance is withdrawn prematurely through an upward movement in market interest rates.”
Still, Bean told the audience the BOE’s main aim is to clarify what it takes into account when setting policy rather than pledging to keep rates lower than would be appropirate to inject extra stimulus.
Bean yesterday pushed back against Aug. 23 comments by Carstens and the IMF’s Lagarde that policy makers in advanced nations should do more to coordinate monetary policies.
Although central banks should try to communicate their strategies, it was not “viable” for them to take account of spillovers on other economies in their decision-making, he said.
The Fed found support from Luiz Awazu Pereira, deputy governor of Brazil’s central bank, who said slowing stimulus from the Fed should be “positive” for his country because it would show the U.S. economy is gaining strength. Brazil this week sought to stem the world’s worst currency decline by announcing a $60 billion intervention program involving swaps and loans to prop up the real after it fell to a four-year low.
“For us, the exit from unconventional monetary policy was perhaps a long-awaited predictable process,” Awazu said. “The puzzle is why is it with all this careful preparation things got a little bit out of hand.”
Lagarde said in the Bloomberg Television interview that “clarity of when things will happen, how things will happen” is needed as the Fed considers unwinding its bond-buying program in order to minimize the impact on financial markets and the effect on emerging markets.