I've written here a number of times that it makes little sense to assume that the cure for the global credit crunch is to cut interest rates. The credit crunch is the result of years of excessively lax monetary policy, primarily in the United States. How can you expect to fix it by doing more of the same?
The major central banks seem to be coming to the same conclusion. The ECB, which never joined in with the Anglo-Saxon cheap money frenzy with any great enthusiasm, has given a pretty clear hint that its next rate move will be an increase. Eurozone inflation is way above the 2% target (which is, admittedly, honoured mainly in the breach) and the economy is holding up reasonably well, so in the ECB's mind there is nothing standing in the way of a cautionary rate hike during the summer. (As an aside, does the ECB now have any rival as the most credible central bank out there, apart from perhaps the Reserve Bank of Australia?)
At the Bank of England, gloom over the economy seems to be deepening. However, soaring industrial prices (input costs up more than 8% in the past year) portend further rises in consumer inflation and all but rule out further rate cuts.
Then there's the Fed. Chairman Bernanke has followed the dubious example of the "maestro" Greenspan in easing aggressively, but now seems to be calling a halt. His optimism that the worst of the crisis is over may well prove premature, but his comments about the feedback between the weak dollar and domestic inflation suggest a change in emphasis, with markets even speculating about higher rates by August. (Well, who'd have guessed that the lowest rates in history would eventually lead to inflationary pressures? Not Greenspan, for sure). It's a sign of changing times that Bernanke is even talking about the dollar. Usually it's a subject that Fed chairmen leave to the Treasury Secretary, who generally mouths meaningless cliches like "this administration supports a strong dollar".
The best reason for putting an end to the rate cuts is that they aren't helping the economy, but they are adding to price pressures. Here in the UK the Bank of England's easing moves have generally been followed without any delay by lending rate INCREASES by the major banks. In the wholesale money markets, the spread between interbank rates and the Bank of England rate, which is normally in single figures, is stuck near 80 basis points. Even ten months or more into the crisis, banks simply don't trust each other the way they used to. Until they do, monetary easing will be like pushing on a string. It's not quite a Keynesian liquidity trap, because rates are not yet down to zero, but it's the next worst thing.
There is a way out, of course, though it's not going to be the short and painless one that politicians would like to see. The shakeout in the banking system, of which Northern Rock in the UK and Bear Stearns in the US are conspicuous examples, is the markets' way of winnowing out those who overreached during the boom years. On the other side of the coin, capital-raising measures, including equity injections into large US banks by sovereign wealth funds and equity rights issues by UK banks, will bolster the survivors.
Once markets are sure that all the dirty linen has been aired and all the bad guys have been retired to the sidelines, banks will start lending again. While we wait for that to happen, central banks need to make sure not to get in the way, but there is no point -- and considerable inflationary risk -- in their trying to chivvy the process along by cutting rates any further.
No comments:
Post a Comment