Soc Gen: Central bank monetary policy is losing its 'punch'

Just before things got messy. Photo: Quinn Rooney/ Getty.

The move by the Bank of Japan (BoJ) into negative interest rate territory last week was just the latest move by central banks around the world to address what has become a chronic inability to sustainably kickstart either economic growth or inflation.

That’s a concern and threatens central bank credibility says Michala Marcussen, global head of economics at Soc Gen.

In a note to clients, Marcussen said that while the Bank of Japan was aiming at shock and awe in its unexpected move to negative interest rates Friday, “the volatile trading the followed the BoJ move did not reflect the confidence that the central bank had no doubt hoped to inspire.”

“This, to our minds, is a serious concern,” she added.

Key here is that even though BoJ Governor Haruhiko Kuroda said, after Friday’s decision, that “through the minus interest rate combined with quantitative easing, I hope we can support companies and individuals in breaking their deflationary mindset,” it’s not working in the real economy and is suffering diminishing returns in financial markets.

That’s a reflection that while “solid central bank credibility was long taken as a given,” that credibility has recently been undermined by the lack of traction central banks are getting from their policy actions Marcussen said:

With many central banks continuously falling short of meeting inflation targets, and this despite exceptional monetary policy accommodation, there is growing concern that monetary policy transmission channels are impaired. Common causes cited are still high debt stocks, financial regulation, an FX race to the bottom and generally lacklustre global growth. The unwinding of the EM and commodity credit bubble has recently added a headwind to central banks’ efforts to return inflation to target (and with that economic growth to potential).

Whatever the excuse, central banks are missing their targets. But, they have been more successful, highly so Marcussen says, “in stabilising (and even boosting) financial asset prices.”

That means there is a “gap between the success of monetary accommodation for the financial and real spheres” which has lead to some inevitable criticism Marcussen said. But she stressed the real economy could be in much worse shape “should financial stability also be threatened.”

“Then the chances of economic recovery would dwindle into non existence,” she said.

But in what sounds like a warning that the chance of such an outcome is rising, Marcussen said [our emphasis]:

Our concern is that recently, the market response to renewed central bank action no longer seems to carry quite the same
punch.
The weeks ahead will bring an important test hereof.

That means that the baton needs to be handed from central banks and monetary policy to fiscal policy and the reluctant recipients in the political class still worried about debt and deficits.

“Ultimately, we expect to see greater use made of the fiscal tools to stem downside risks, and not least in Japan,” Marcussen said.

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