Central banks globally have spent years fruitlessly trying to awaken long-dormant inflation, and some analysts say it’s time to stop trying.
Anemic inflation has become a bugaboo for global central banks, with frequent mentions in the meeting minutes.
It’s been a speed bump in the U.S. Federal Reserve’s path toward normalizing interest rates, with members voting at the July meeting to keep the current target rate in a 1 percent to 1.25 percent range.
Minutes from that July decision show some policymakers were pushing for caution on rate hikes due to low inflation. The Fed’s target is 2 percent inflation, and its preferred measure of inflation is at about 1.5 percent.
It’s not limited to the U.S. by any stretch: Japan’s colossal struggle to goad inflation to life has been a stalemate at best.
Since the Bank of Japan launched a massive quantitative easing program in 2013, the country has exited deflation. But even the September 2016, introduction of a “yield-curve control” policy, seen by markets as essentially a “whatever it takes” stance on boosting inflation, hasn’t seemed to move the needle much.
Japan’s core consumer price index, which includes oil products and excludes fresh food, rose 0.5 percent year-on-year in July, Reuters reported on Friday.
That compared with the BOJ’s goal for inflation to meet or exceed its target of 2 percent “in a stable manner.” It also was oddly jarring compared with Japan’s economy growing a better-than-expected annualized 4 percent year-on-year in the April-to-June quarter.
Some analysts have said the persistently low inflation was a signal that central banks shouldn’t be using inflation to guide monetary policy.
“If we’ve got growth at trend, which most places appear to have, if we’ve got the unemployment rate at full employment, which most places appear to have, then we shouldn’t even worry about what inflation is doing,” Rob Carnell, head of research for Asia at ING, said recently.
“This constant attempt to drive it higher and make it bigger, because it’s not 2 percent is just wrong,” he added, noting that quantitative easing was distorting markets.
As an example, he pointed to Thailand’s 10-year treasury bond. That was yielding around 2.42 percent on Friday, compared with the arguably far less risky 10-year U.S. Treasury, which was yielding only a slightly lower 2.1886 percent.
Instead, Carnell said inflation should only be a secondary target, with more attention paid to the rate of credit growth.
Advocating eschewing an inflation target, or at least moving away from aiming for a 2 percent rate, isn’t an entirely new idea.
Robert Heller, a former Federal Reserve governor from 1986-1989, said that, in his opinion, the 2 percent inflation target wasn’t entirely in line with the central bank’s Congressionally mandated goal of price stability.
Instead, the goal should be zero percent inflation, he said, but acknowledged the difficulty of hitting that target exactly.
“If the Fed and other central banks say they want 2 percent or less, that’s fine with me. The closer to zero you get the better it is,” he said.
Others didn’t think getting rid of inflation targets would happen anytime soon.
“Almost all central banks have adopted it,” said Shirai Sayuri, a professor at Keio University whose five-year term at as a Bank of Japan governor ended in 2016. “They worry if they change the framework, it’ll have an impact on inflation expectations.”
In Japan’s case, “it’s very difficult to achieve 2 percent for a while, but that doesn’t mean they should abandon the 2 percent target,” she said. “As a central bank, it’s not a good idea to drop a target that they’ve already introduced,” although the bank can extend the time frame for when it can be achieved.
But she added that the massive monetary easing programs, particularly in Japan’s case, weren’t sustainable and she was very concerned about market distortion.
At least one analyst was sticking with the importance of keeping an eye on the inflation ball.
“What we know from experience, both theory and historical experience, when inflation moves to extremes, either very low or very high, generally that ends up having a bad outcome on economic growth, on employment, on other indicators we care about,” Manpreet Gill, head of fixed income, commodity and currency investment strategy at Standard Chartered Private Bank, told CNBC’s “Street Signs” on Wednesday.
“We do need to care about it,” he said.
Report courtesy CNBC
Frontpage November 4, 2020