The Bank of Japan and the European Central Bank will refrain from any major changes when their policy-making committees meet later this week, even though both economies have recently been experiencing their strongest growth in more than a decade.
For now, inflation (that is deemed too low) and currencies (that are deemed too strong) will dominate the decision-making process — though probably not so much as to preclude hints at a gradual future shift away from the easing bias that has dominated the banks’ policy stance for several years.
The ECB is likely to have the more divided internal policy discussions when its Governing Council meets on Thursday. The major issue relates to the policy guidance the ECB provides to markets about what happens after the current program of monthly purchases of €30 billion (Dh$135 billion) runs out in September (as previously signalled).
Comforted by stronger growth and worried about the unintended consequences of prolonged reliance on unconventional monetary measures, including the ultra-stimulative stance inherent in the quantitative easing program and negative policy rates, some members of the council will push for what the bank’s president, Mario Draghi, in January called a “sudden stop” — that is, ending asset purchases in September. They will dismiss the uncertainties associated with the March 4 elections in Italy, where more centrist forces were crushed by two anti-establishment parties, Five Star and the Northern League, which together captured about 50 per cent of the vote. And they will point to the formation of a coalition government in Germany led by Chancellor Angela Merkel that promises to work closely with French President Emmanuel Macron in reigniting work on closer European integration.
Others will argue for a more gradual and conditional policy path, seeking at a minimum to delay any signals until the summer. In doing so, they will cite concerns about lowflation, currency appreciation and the possible peaking of Europe’s cyclical growth drivers. They may also point to the possible regional impact of uncertainties about US trade policy.
Rather than make a decision this week, the ECB is likely to punt and keep quiet about its specific policy intentions until the summer. But this may not preclude signals regarding the long-standing signal of an “easing bias” — specifically, working toward the removal of the presumption that, should the baseline outlook not materialise, central bankers are more likely to ease than tighten.
The BOJ will also be considering such a tweak, though it may lag the ECB in adopting the change. Indeed, apart from the political component, the Japanese central bank faces a similar balance of arguments when it considers how to evolve its own policy of asset purchases, ultra-low policy rates, and an explicit interest rate cap on 10-year government bonds. It will also seek to avoid making waves while parliament is considering nominations to the Policy Board.
The two central banks’ hesitancy to do anything more than start altering their easing bias may be viewed by some as further evidence of ultra-dovish policy stances. But taking that approach would amount to missing a larger reality.
After many years of experimentation with, and prolonged reliance on, unconventional monetary policy, central banks in advanced economies, led by the Federal Reserve, are at various stages of a transition. As I have argued before, this slow, measured and still-conditional policy redirect will result, over the next few quarters, in making highly sequential quantitative tightening more simultaneous. And this process will put in place the conditions for eventual higher policy rates in Europe and Japan, together with a market exit from negative-yielding government bonds (in nominal terms).
The speed of this transition, for both individual institutions and the central banking community as a whole, will be a function of high-frequency data (especially inflation and currency moves). Another important factor will be the measures implemented by national governments as they become more active in economic policymaking in key advanced countries such as France, Germany, Japan and the US In the process, we will discover whether the central banking community as a whole can deliver what the Fed has been able to produce on its own so far: a “beautiful normalisation.”
Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He was chairman of the president’s Global Development Council, CEO and president of Harvard Management Company, managing director at Salomon Smith Barney and deputy director of the IMF. His books include “The Only Game in Town” and “When Markets Collide.”
