2013: Year of the Central Banker


The world’s top central bankers will get little rest in 2013.


Growth is expected to be lackluster this year in many developed countries, and interest rates are stuck near zero in Japan and the United States. Credit Suisse analysts believe that real interest rates will remain negative for at least a decade.


In such an environment, the action central banks take will be closely watched.

Here, The Financialist explores what’s ahead for the Big Four.


Federal Reserve

Last year:

The Fed announced specific thresholds the U.S. economy must cross before the central bank considers raising rates – among them, a 6.5 percent unemployment rate.


The Fed also reiterated its intention to keep up its current asset-buying program until the jobs outlook improves substantially.


So far:

Late last month, the Federal Open Markets Committee announced it will continue buying $85 billion in mortgage-backed securities and Treasury securities each month.



Credit Suisse analysts expect the current round of open-ended quantitative easing to continue through this year, and potentially into next year, adding about $1 trillion to the central bank’s balance sheet.



Bank of England

Last year:

The November announcement that Bank of Canada Governor Mark Carney will succeed Sir Mervyn King as governor of the Bank of England this July surprised many central bank watchers.


The U.K. faces both stagnant growth and inflation consistently above the 2 percent target rate. Some observers believe Carney is likely to pursue a more aggressive inflation target to spur growth.


Also in 2012, the central bank and Treasury launched a program that allows banks and building societies to borrow from the Bank of England for up to four years in exchange for business and mortgage loan assets. At the beginning of the year, the program appeared to be working, making credit more accessible to businesses and households, Credit Suisse reported.


So far:

At its most recent meeting earlier this month, the Bank’s Monetary Policy Committee (MPC) warned that inflation could stay above 2 percent for the next two years, but decided the economy was still too weak to end stimulus measures. The Committee voted to keep the bank rate at 0.5 percent and maintain its asset-purchase program at £375 billion ($587 billion).


Carney, in testimony before a parliamentary committee, expressed little enthusiasm for raising the inflation target.



After Carney’s testimony, Credit Suisse Analyst Thushka Maharaj wrote that the bank seems more likely to expand the timeline for meeting the inflation target from 2-3 years to 3-5 years than to change the target itself. Maharaj noted that Carney did not rule out buying assets other than sovereign bonds, but seemed to prefer the current funding-for-lending program described above.


European Central Bank

Last year:

ECB President Mario Draghi’s statement last summer that he would do whatever it takes to save the euro was a turning point in the regional crisis. The bank announced the Outright Monetary Transactions (OMT) program, which would allow it to buy sovereign bonds on the secondary market after a country asks for help and agrees to certain fiscal conditions. The move was widely seen as a bid to ease the potentially crushing debt burdens of Spain and Italy.


So far:

Spain, the first country that was expected to participate in OMT this year, has not yet signed up. The program’s mere existence, however, has had some positive impact by lowering the interest premium investors demand to hold Spanish debt, therefore lowering the country’s overall obligations.


At its most recent meeting earlier this month, the ECB took a more dovish tone than many analysts had expected, partly because the value of the euro has been rising – a development that could hurt the region’s chances for emerging from recession this year.


While central bank balance sheets are expanding in the U.S. and Japan, the ECB’s bottom line is shrinking because regional banks that borrowed money under the Longer-Term Refinancing Operations program are paying back the money.



Credit Suisse analysts believe that inflation across the euro zone will fall below 2 percent this year and stay there through 2014. Draghi’s comments, they said, left room in ECB policy for future interest rate cuts to bolster growth. Credit Suisse Economist Christel Aranda-Hassel wrote recently that the ECB is unlikely to take action until the exchange rate hits €1.40 to the dollar. At that point, the bank would likely cut the repo rate.


The ECB balance sheet could expand again if OMT is triggered, Aranda-Hassel said, noting that periphery countries may be more likely to ask for assistance if the euro keeps appreciating. If the assistance program does go into effect, Credit Suisse analysts say the stakes for successful implementation are high.




Bank of Japan

Last year:

The election of former Prime Minister Shinzo Abe led to renewed pressure on the Bank of Japan to fight deflation and stalled growth more aggressively.


So far:

The Bank of Japan increased the country’s target inflation rate from 1 percent to 2 percent and pledged “open-ended” asset purchases starting in 2014. Still, this year’s ¥34 trillion ($370 billion) increase in asset purchases dwarfs the ¥10 trillion increase planned for 2014.


The bank also said it would keep interest rates near zero until the 2 percent target appeared feasible, and Abe has pledged a large fiscal stimulus.



Credit Suisse economists and analysts are somewhat optimistic about Japan’s prospects. Chief Japan Economist Hiromichi Shirakawa raised his forecast recently from 0.2 percent GDP growth in 2013 to 1.2 percent. Shirakawa also expects inflation to nudge slowly upwards, though likely remaining negative this year. He notes that that the central bank may need to set negative interest rates or buy assets other than Japanese government bonds for inflation to really take hold.


Shirakawa has also said there is a 30 to 40 percent chance that the government could enact legislation that gives elected leaders more control over monetary policy.


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