The Bank of Japan welcomes a new anti-deflation governor this week, the Bank of England might get a new pro-growth mandate and the Federal Reserve is likely to stick like glue to its aggressive bond-buying programme. Together, the three events speak volumes about the balance of risks in a global economy that is on the mend but still a long way from rude health.
Unemployment is intolerably high in the United States and most of Europe, while growth in many countries is well below its pre-crisis trend. As a result, inflation is firmly subdued. Add to that the inability of many heavily indebted countries to cope with higher borrowing costs, and it is no wonder that central banks will do whatever is needed to keep a lid on bond yields, said Joachim Fels, chief international economist at Morgan Stanley in London.
"Despite the uptick in growth that we see, we don't think central banks are done easing yet," Fels said. "The fears that we get an early exit from quantitative easing and negative real interest rate policies are unfounded, at least for this year." Supportive monetary policy is a big reason why Fels expects the global economy to emerge from the twilight as 2013 unfolds.
"We're still talking about sub-trend GDP growth this quarter and next. But in the second half of this year, we think we will move into daylight," he said. For once, the Bank of Japan will be an important driver of this global reflation if Haruhiko Kuroda, who takes over at the helm of the central bank on Wednesday, makes good on his pledge to stop Japan's long deflationary rot. Other central banks will feel the need to remain expansionary if their currencies rise due to yen weakness triggered by bold BoJ easing, Fels said. Chancellor of the Exchequer George Osborne, Britain's finance minister, is expected to announce a review of the BoE's inflation-focused remit, or possibly outright changes to it, when he presents his annual budget on Wednesday.
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