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Breaking out of the dovecote

Breaking out of the dovecote

G7 central bankers: novices in raising rates

by David Marsh

Mon 10 Aug 2015

With the last concerted rise in world interest rates nearly a decade ago, the doves have been ruling the monetary roost since the financial crisis. None of the central bank governors of the G7 leading industrial countries has any experience of tightening credit in their present jobs.

The monetary leaders – Janet Yellen of the Federal Reserve, Haruhiko Kuroda of the Bank of Japan, Mario Draghi of the European Central Bank (accounting for Germany, France and Italy), Mark Carney of the Bank of England and Stephen Poloz of the Bank of Canada – have been in their current posts for a collective 12 years. Not one has raised interest rates in this time.

All that may be about to change. Yellen looks like being quickest, with the odds narrowing on a September Fed rate hike after Friday's monthly non-farm payroll figures showed a July increase of 215,000 jobs, slightly below market expectations but backing an overall picture of robust US economic health.

The rate-setting Federal Open Market Committee has one more set of monthly payrolls before its meeting on 16-17 September, when many market participants are pencilling in the first rate rise for nine years. The average rate of monthly job increases has slowed slightly from early summer, but unemployment was unchanged at 5.3% in July, the lowest since 2008, close to the 5.2% that the Fed believes is an effective floor.

In recent months, representatives not only of industrial nations but also of some emerging market economies – which previously feared Fed tightening – have been privately urging Yellen to forge ahead with a move that most judge as a sign of confidence in the world economy.

Next in line in the tightening stakes is Carney of the Bank of England – who had his experience of raising interest rates in his previous job as Bank of Canada governor in 2010. Since he arrived in London from Ottawa in July 2013, Carney has demonstrated varying positions on an exit from eight years of UK easing, but he now looks likely to back an increase in interest rates in the first half of 2016. Sluggish wage increases, a further fall in oil prices and the high value of sterling have all damped UK inflation concerns. But last week the UK central bank depicted the British economy in more optimistic tones than for several months and increased its 2015 growth forecast.

There is little hawkishness among the other G7 central bank governors. Japan’s Kuroda has vowed to continue full-scale BoJ quantitative easing to achieve the bank’s 2% inflation forecast. Draghi – who acted promptly when he took over in November 2011 to reverse premature interest rate rises by Jean-Claude Trichet, his predecessor – leads an ECB council that favours accommodative policies. Poloz, Carney’s successor, in July cut Canadian interest rates to a five-year low as the effects of lower oil prices reverberated throughout the economy.

Among leading emerging market central bankers, Governor Zhou Xiaochuan of the People’s Bank of China has been in his job for 12½ years, longer than all his G7 peers combined, with two experiences of tightening in that time. But the PBoC, which doesn’t act independently but moves in concert with China’s state council, is now back in dovish mode, cutting interest rates and reserve requirements on the same day last month as part of an effort to overcome stock market turbulence.

With the exception of Zhou, all today’s leading central bank figures have been in their jobs for only relatively short periods. Their initial dovish experiences contrast with the much more hawkish record of some well-known earlier central bankers – above all the Fed’s Paul Volcker and the Bundesbank’s Karl Otto Pöhl and Helmut Schlesinger – whose first months in office – in respectively 1979, 1980 and 1991 – were marked by controversial bursts of interest rate attrition.

Another Bundesbank president otherwise known for monetary orthodoxy – Hans Tietmeyer, who took over from Schlesinger in 1993 – ran the German central bank for six years without once raising interest rates, reflecting a steady alleviation of monetary pressures in Europe on the path to monetary union in 1999. The next few years will show whether any current incumbent can match Tietmeyer’s record.

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