Monday, February 11, 2013

The conundrum for the world’s central bankers

by Mohamed El-Erian

Financial Times

February 11, 2013

A simple observation last week by the Bank of England’s Monetary Policy Committee speaks volumes to the historic evolution of modern central banking – a process that is consequential, unprecedented and inadequately covered in traditional “money and banking” texts.

In its February 7 statement, the MPC stated that, due to a sluggish UK economy facing fiscal contraction, it is “appropriate to look through the temporary, albeit protracted, period of above-target inflation”. And it sure has been “protracted”; and will remain so.

The last time UK inflation came in below target was November 2009. If official projections are accurate, inflation will stay above target until the third quarter of 2014 – or a divergence of more than 50 consecutive months. To quote Mike Amey, my Pimco colleague, the target has become a “loose reference tool”.

The BoE is not the only central bank coping with inconsistencies. The European Central Bank has repeatedly been forced to react in ways once deemed contrary to its philosophy and practices. Under pressure from the new government, the Bank of Japan is in the midst of a historical U-turn.


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