Financial Power Shifts from Central Banks
Times they are changing, and nowhere is this clearer than in the shift of financial power taking place in advanced economies around the world. It is an intimidating but necessary change in the view of most financial experts, even though it will see the end of a system that has controlled the world’s financial systems for the last 20 years. The question for the local economy is what the stance of Australian banks like Bankwest etc. will be within this worldwide shift.
The election of the new Japanese government of Shinzo Abe has seen Governor Masaaki Shirahawa take the first steps to restrict the Bank of Japan’s independence and put the pressure on reigniting the economy. The Prime Minister has called a conference in order to achieve what has been called “unlimited monetary easing” to stimulate economic activity.
Abe has issued an ultimatum, saying that Shirakawa will be removed from office if the targets are not met and has stated that the law giving the Bank of Japan its independence will be reviewed if the strategy is not successful.
Monetary power is also shifting balance in Europe, the US and Britain with the US Federal Reserve stating that rates will not be increased until the unemployment rate drops to less than 6.5% which is the first time such a benchmark has been set. In Europe the European Central Bank governor was accused of abandoning inflation control in order to support financially weaker members of the European Union in front of the European Parliament. At the same time the Bank of England’s new governor Mark Carney has hinted that inflation targeting may be forfeited in order to achieve nominal economic growth (which is a combination of economic growth and inflation).
Australia is one nation that does focus on inflation targeting and critics have said it is at risk of becoming marginalised as other advanced economies explore interventionist avenues to manage their local economies.
Central banks have had complete control over their economies since the 1990s in many countries in order to create price stability through regulation of interest rates. The concept of central bank independence goes back further than this however, as far back as Germany’s economic revival after its Second World War defeat. The first time inflation targeting was established was in New Zealand in the 1980s but as economic times and needs have changed advanced economies have been forced to review their policies and modus operandi.
In inflation targeting the government plays a supportive role in the relationship by creating a strategy but allowing the budget to shift between surplus and deficit in response to economic factors. It would only intervene when conditions are extreme but is otherwise uninvolved.
In the aftermath of the global financial crisis however inflation in many advanced economies has taken a back seat to the need to stimulate growth. And, as interest rates are near-zero in many developed economies central banks have had to come up with other innovative ways to create growth opportunities. In most cases government securities have been purchased in order to drop interest rates and central banks have injected the markets with cash to encourage consumers to use it. And, as banks purchase government bonds, the boundaries between monetary and fiscal policies have become blurred.
The Reserve Bank of Australia has said that the last five years of stagnated growth are evidence of the government’s lack of reform and the central bank’s inability to compensate for it. Glenn Stevens has said that the advanced central banks’ interventions were analogous with “exporting weakness”, which places even more pressure on the local currency, lowering market demand for local goods and boosting the demand for imported goods.
Category: Banking
