April 2014: Monetary tussels

The world economy remains influenced by a pattern of light and shade. Janet Yellen, the chairman of the Federal Reserve, has been subjecting markets to a variety of signals, most of which buttress her credentials as fully paid-up head of the world dovish fraternity. Signs of deflation in the euro area have multiplied, strengthening the euro in a way that makes the debt problems of the ill placed peripheral counties still harder to bear. All this puts fresh onus on the European Central Bank to take some kind of easing action. Some form of quantitative easing may be getting closer after the positive comments made on the subject by Mario Draghi, the ECB president, on 3 April. On the other hand, Draghi – rather as he did over the so-called Outright Monetary Transactions programme – may
be trying to get maximum impact from cleverly-worded verbal interventions without actually having to take real action. The risks that markets could face a conflagration over Ukraine and Russia has diminished somewhat, but following Moscow’s annexation of Crimea nervousness abounds. A range of other important emerging market economies including China, India, Brazil and Turkey face economic and political uncertainty of different kinds.

Our cover story focuses on the difficulties faced by central banks as they adjust to a new environment in which they were afforded wider powers after the financial crisis but must inevitably live now with greater constraints, including on their much-cherished independence. This was a subject we brought to wider attention in a joint report issued with Ernst & Young in November 2012: worthy of further explanation in the future. In the April edition, we highlight the challenges to the credibility of one of the most celebrated and best regarded central banks, the Bank of England, now subject to wide-ranging structural change under its new governor Mark Carney. The ECB, too, has become more exposed to political influences of different kinds. This forms part of an extension of its authority into banking supervision and financial stability and of the long overdue efforts to intensify economic integration in the euro area. And we shed light on one relatively little-illuminated reason for limitations on central banks’ independence. This reflects a fall in their profits from reserve asset operations as a result of the decline in yields on the central banks traditional home for their reserves in triple A-rated bonds and bills issued by the major industrialised countries.

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