It’s a big week in the world for monetary policy. The central banks of the U.S., England and Japan are meeting, separately, and the big question is what each bank will signal in terms of interest rates. Here at home, the conversation is around if and when the Fed might start cutting rates. But what about the U.K. and Japan?
In the U.K., just like in the U.S., the mission has been to quell inflation, which has meant higher interest rates.
“For the last couple of months, we’ve seen CPI inflation for the U.K. back at 2%. And that’s the Bank of England’s target. So you might think, well, you know, job done,” said Jane Foley, head of FX strategy at Rabobank.
But it’s not so simple:
“Goods price inflation has fallen quite a lot, services inflation is proving to be very sticky in the U.K. In fact, it’s stable at about 5.7%,” she said. “And 5.7%, is clearly a lot higher than 2%. So it’s a real headache for policy setters.”
Foley said if rate cuts do start this week, they will likely continue in small, slow increments.
Over in Japan, it’s a whole different story, said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics.
“(They’ve) tried to increase the amount of inflation in Japan from practically zero to get it up to 2%,” he said.
Let me repeat: They’ve actually tried to increase inflation, keeping interest rates low to stimulate a sluggish economy.
Now, Japan’s inflation has surpassed 2%. But the economy still isn’t where policy makers want it to be.
“In fact, consumers are kind of like, you know, are not happy and sort of reining in spending a little bit of wages have not kept up,” said Ken Kuttner, an economist with Williams College.
It’s actually the depreciation of the yen that’s been a big contributor to inflation, Kuttner said.
“The yen is so, so cheap. And so that’s increasing the cost of imports,” he said.
That’s put the Bank of Japan in an awkward predicament — raise rates or keep them low?
In other words, Kuttner said, “Do we start doing contractionary policy, even though the economy does not have a full head of steam?”
Whether too much or too little inflation, setting interest rates is a delicate balance.
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