The Wall Street Journal’s Daily Report on Global Central Banks for Wednesday, April 15, 2015:
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The world’s leading central bankers, descending on Washington D.C. this week for semiannual meetings of the International Monetary Fund, have a long-run growth problem to address. In the World Economic Outlook prepared in advance of the meetings, IMF economists argue that the global economy’s capacity to grow will be hamstrung for years, weighed down by slowing population growth, declining productivity and a dearth of investment.
The growth outlook, the IMF argues in chapter 3 of the WEO, will hold down interest rates and expose central bankers in advanced economies to a lingering dilemma – shocks that send their economies into recession could send rates back to zero and force them to resort to unconventional monetary policies. Public debt burdens, moreover, will be hard to reduce.
The report reads a bit like Lawrence Summers’ secular stagnation thesis, but with a new twist. The problem, the IMF argues, is getting worse in emerging market economies, especially China. Potential growth soared in emerging markets from 6.1% in the 1990s to 7.4% between 2001 and 2007, thanks to rising investment and productivity. It slowed to 6.5% after the crisis and will slow further still to 5.2% from 2015 to 2020, the IMF projects. The IMF says the slowdown could be even larger in China:
“In emerging market economies, potential growth is likely to decline further, as potential employment growth is expected to slow. Because of less favorable external financing conditions and structural constraints, capital accumulation growth is likely to remain below precrisis rates in these economies, especially in China, where it may decline further as growth shifts toward consumption. And without policy changes, the growth of total factor productivity is not likely to return to its high precrisis rates in emerging market economies, given the expected further movement of these economies toward the technological frontier.”
Potential growth is a result of the supply side of the economy – the effects of population, productivity and investment. Policy makers have tended to focus much of their attention in the post-crisis period on the demand side of the economy – notably stimulus provided by central bankers through low interest rates and bond buying programs. As the IMF notes, it is becoming increasingly urgent that policy makers start working on the other side of the equation.
-By Jon Hilsenrath
MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD
Two Fed Regional Banks Shift Positions on Discount Window Lending Rate. Two of the Federal Reserve’s 12 regional banks last month shifted their positions on the central bank’s discount window lending rate, the interest rate on short-term loans offered to sound banks, which has been 0.75% since February 2010. The Cleveland Fed joined three other banks calling for an increase to 1%, while the Minneapolis Fed called for a reduction to 0.5%.
Fed’s Kocherlakota Worried Too-Low Inflation Could Persist for Years. Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Tuesday he is worried undesirably low levels of inflation could be embedded in the U.S. economy for years to come. “I’m much more worried about the downside” of having inflation stay persistently under the Fed’s 2% target, Mr. Kocherlakota said. “We’ve see in Europe and Japan, that when inflation gets stuck at low levels, it’s very hard to get it back up,” he said.
Fed’s Dudley Says Local Governments Must Manage Finances Carefully. New York Fed President William Dudley said Tuesday state and local governments must carefully manage their finances and borrowing to avoid getting into trouble. “Managing their liabilities in such a way as to ensure that these vital services continue to be provided, and citizens view that they are getting appropriate value in exchange for their taxes is a daunting challenge,” he said.
U.S. Senate Banking Panel Launches New Investigative Team – Reuters. The U.S. Senate Banking Committee has set up an investigative team in recent weeks that will probe issues ranging from financial regulation to insurance fraud, part of a drive by its new chairman to beef up the panel’s oversight function. Senate Banking Chairman Richard Shelby (R., Ala.) who took the top post this year after Republicans gained control of the Senate, had pushed for the committee to establish an investigation team throughout the 2007-2009 financial crisis, while the panel was controlled by Democrats.
Retail Sales Up, But U.S. Spending Picture Still Mixed. U.S. retail sales rose for the first time in four months in March. But the gain was concentrated in autos and wasn’t enough to offset weaker outlays during the winter months, suggesting more than just bad weather has been holding back consumer spending.
Euro Depreciation Will Restrain the U.S. and China for Years, the IMF Says. Short-term currency pain for the world’s two largest economies will ultimately bring long-term economic gain. That’s one of the key messages from the International Monetary Fund in its latest World Economic Outlook released Tuesday. Bleak growth prospects are leading the fund to back more easy-money policies in Europe and Japan that will depreciate the euro and the yen and juice their economies. For the IMF, the threat of global economic anemia outweighs potential asset bubbles, emerging-market crises and the drag on growth in the U.S. and China as the strengthening dollar and yuan curb exports.
More from the IMF’s World Economic Outlook:
– Slowing Emerging-Market Growth is Sapping Global Economic Prospects.
– Supply or Demand? The IMF Breaks Down the Collapse of Oil Prices.
Rise in Eurozone Saving Rate Sounds Deflation Alarm. Figures released by Eurostat Tuesday showed the eurozone’s saving rate continued to rise as 2014 drew to a close. The rise will send minor alarm bells ringing for those who fear that households may respond to falling consumer prices by postponing discretionary purchases. It will take some time before we know whether that was a late 2014 blip or something longer-lasting, since the figures are released with a substantial lag.
European Central Bank Lifts Ceiling on Greek Loans. The European Central Bank on Tuesday increased the amount of money Greek banks can borrow under an emergency-lending program, extending a lifeline for the country’s banks as its government continues tense negotiations with its creditors over its bailout program.
BOJ Kuroda: Underlying Inflation Trend “Steadily Improving.” Bank of Japan Gov. Haruhiko Kuroda said Wednesday that the inflation trend is improving “steadily,” in another sign that the central bank feels little urgency yet to boost its monetary stimulus. The annual rate of inflation, as gauged by consumer prices, may have fallen back to zero in recent months, but corporate behavior in setting wage and sales price levels are changing in a sign that inflation expectations are rising, Mr. Kuroda said in his speech to a gathering of trust banks — Dow Jones Newswires.
China’s First-Quarter Growth Slowest in Six Years at 7%. China’s economy started the year on a downbeat note with its slowest quarterly growth rate since 2009, pointing to a further loss of momentum for the world’s second-largest economy.
Polish Central Bank Leaves Interest Rates Unchanged. The National Bank of Poland left its interest rates unchanged on Wednesday, in line with expectations and its earlier guidance. The central bank in March cut its main rate to 1.5%, the lowest on record, and said it was unlikely it would return to talk of more easing in the future — Dow Jones Newswires.
Hong Kong Monetary Authority Expects More Stock Volatility From Cash Inflows. The head of Hong Kong’s de facto central bank said Wednesday he expects increasing volatility in the city’s stock market, as cash from the mainland and elsewhere floods in and pushes the local currency higher. Heavy fund flows have forced the Hong Kong Monetary Authority to intervene in the foreign-exchange market since last Thursday to prevent the Hong Kong dollar from strengthening past the upper limit of its narrow trading band — Dow Jones Newswires.
Turkey’s Central Bank Moves to Support Currency. Turkey’s central bank said Tuesday it may consider various measures at its monetary policy committee meeting next week, after the lira slumped to new record lows against the dollar. The central bank said the agenda of the monetary policy committee of April 22 will include a measured cut in foreign currency deposit rates and a measured increase in the interest rates paid on Turkish lira reserve requirements –Dow Jones Newswires.
Russian Finance Minister Hopes for Lower Inflation, Rates. Russia’s finance ministry hopes that its fiscal policy will pave the way for lower interest rates, Finance Minister Anton Siluanov said Tuesday. “We create the necessary conditions for the rate, together with inflation, to go lower,” he said. The Bank of Russia jacked up the key rate to 17% in late 2014 but has cut rates twice so far this year, citing fading inflationary risks. The next board meeting is scheduled for April 30 — Dow Jones Newswires.
Small Business Owners Less Upbeat in March, Says NFIB. Small business owners scaled back their enthusiasm in March, according to a report released Tuesday. In turn, they plan on less hiring and capital spending in the near term. The National Federation of Independent Business‘s small-business optimism index fell to 95.2 in March, from 98 in February. Economists surveyed by The Wall Street Journal projected the index to hold at 98.0. The NFIB said the index is the lowest since June 2014 and is back below its long-term average. All 10 subindexes declined last month.
-1145 GMT (7:45 a.m. EDT): European Central Bank releases a policy statement
-1230 GMT (8:30 a.m. EDT): ECB’s Draghi speaks at a press conference
-9 a.m. EDT: St. Louis Fed’s Bullard speaks on the U.S. economy and monetary policy in Washington
-10 a.m. EDT: Bank of Canada releases a policy statement
-10:40 a.m. EDT: Fed’s Fischer moderates a panel on macroprudential regulation in Washington
-2 p.m. EDT: Federal Reserve releases its Beige Book report
-4:40 p.m. EDT: Bank of Mexico’s Carstens speaks on a panel about capital inflows, exchange rate management and capital controls in Washington
-7:30 p.m. EDT: Richmond Fed’s Lacker speaks on “Investing in People for Long-Term Prosperity” in Charleston, S.C.
Too Poor to File (for Bankruptcy). A congressional overhaul of U.S. bankruptcy law may be keeping financially struggling people out of bankruptcy court, but it hasn’t kept them from going broke, researchers have found. A new study from the New York Fed puts a spotlight on a pocket of financially struggling people who, researchers say, are too poor to file for bankruptcy after federal lawmakers changed the law in 2005 and made it more expensive. Specifically, the 49-page study found a “sizable group of individuals exists that does not file for bankruptcy, but seems unable to pay off their debts.”
Optimal Policy and Market-Based Expectations. “Financial market prices can be a valuable source of information for policymakers, including central bankers,” Michael D. Bauer and Glenn D. Rudebusch wrote in a San Francisco Fed Economic Letter. “However, it is important to recognize the limitations of market-based expectations. Market prices may vary for a number of reasons that are unrelated to the fundamental factors of interest to policymakers. Therefore, it appears that policy cannot be formulated exclusively using information in market-based expectations.”
Sometimes, Boosting Supply Requires More Demand. Greg Ip writes in the Journal, “The Federal Reserve, everyone agrees, can boost growth in the short run. But can it do it over the long run? This once heretical concept is the latest argument in favor of the Fed taking its time about raising interest rates.”
Who is Right About the Equilibrium Interest Rate? “The Bernanke/Yellen belief that the equilibrium rate will rise in the next three years as headwinds diminish is at best conjectural,” Gavyn Davies writes for the Financial Times. “It is based on the argument that negative real rates must eventually disappear, since otherwise an infinite increase in investment spending would be viable…Real rates have remained negative for long periods in the past, and there are good reasons for believing that the current episode could be by far the longest in the post war period.”
–Rising exports helped widen the eurozone’s trade surplus in February, an indication that the weakening euro is delivering a boost to the currency area’s modest economic recovery.
– The Central Bank of Sri Lanka or CBSL cut its deposit and lending policy rates by half a percentage point to 6% and 7.5% respectively, at a time when the central bank governor Arjuna Mahendran, who took office in January, was on leave.
– Namibia’s central bank left its benchmark interest rate unchanged at 6.25% Wednesday, having raised it in February. The Monetary Policy Committee said it was still concerned about high rates of credit growth, which is “largely used to finance unproductive imported luxury goods.”
–A gauge of U.S. business prices rose in March for the first time since October, a sign of stabilizing inflation in the economy.
–The Reserve Bank of India unveiled a newly redesigned website on Tuesday.
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