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Central banks: Are economies ready for withdrawal of stimuli?

It is almost certain that central banks will change their accommodative stance in the near future.

AlphaStreet

As things stand now, the big three of central banking – the Fed, ECB and BoJ- don’t seem to be in a hurry to withdraw stimulus measures or increase policy rates. But that may not be the case for very long.

Change in stance 

The minutes of the U.S. Federal Reserve’s last policy meet on June 15-16 2021 indicate a possible shift in the central bank’s stance going forward.  During the meet, most Fed officials opposed any reduction in their monthly $120 billion bond-buying programme as “substantial further progress” towards its goals of maximum employment and 2% inflation target have not been reached.

However, the minutes revealed that there were some who disagreed. It said, “Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases will be met somewhat earlier than they had anticipated at previous meetings in light of incoming data.”

The minutes definitely indicate a strong possibility of the start of formal deliberation of the stepwise reduction of the Fed’s bond buying programme in its next meet on July 27-28. According to officials, “As a matter of prudent planning, it was important to be well positioned to reduce the pace of asset purchases, if appropriate, in response to unexpected economic developments, including faster-than-anticipated progress.”

Close parallel

ECB President Christine Lagarde has set a new inflation target at 2% in the medium term on Thursday, as opposed to “below but close to 2%” earlier. Addressing a news conference Lagarde said, “We believe the 2% target is clearer, simpler to communicate and a good balance. We know that 2% is not going to be constantly on target, there might be some moderate, temporary deviation in either direction of that 2%. And that is OK.”

Earlier, conflicting views regarding the cessation of the purchase of emergency bonds – initiated during the pandemic – were also prevalent among the ECB’s policymakers. The central bank promised to continue the 1.85 trillion-euro ($2.21 trillion) Pandemic Emergency Purchase Programme (PEPP) “until it judges that the coronavirus crisis phase is over”. The withdrawal of PEPP as the economy improves is expected to cap any abnormal surge in inflation.

An encore

In its June policy meet, the Bank of Japan kept interest rates in negative territory, that is, at minus 0.1%. The bank also maintained its stance and kept the monetary policy loose. Japan’s central bank extended Covid-19 support measures till March 2022.

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