Central banks should accept that reversing crisis-era monetary policy will be “bumpy” and should not delay doing so just for fear of upsetting financial markets, the Bank for International Settlements (BIS) said.
Claudio Borio, who heads the institution’s economics department, urged policy makers to press ahead, both to address financial stability risks and to insulate their economies against the next downturn.
The BIS is effectively a bank for central banks.
“We need to normalize policy and we need to do so with a steady hand,” he said in an interview accompanying the publication of the BIS Annual Report.
“By steady hand I mean, in particular, not being afraid of increases in volatility as long as they remain contained: given the initial conditions, volatility spikes are likely to occur along the way,” he added.
The remarks from Borio, who is known for steering against mainstream thinking, come as the world’s major monetary authorities edge toward more normal policy settings at wildly different paces.
The US Federal Reserve has raised interest rates seven times since late 2015, the Bank of England once, and the European Central Bank (ECB) has only just announced it will stop bond buying this year, with no rate hikes until after summer next year. The Bank of Japan is still adding stimulus.
Borio’s view contrasts with comments a week ago by former US secretary of the Treasury Lawrence Summers, who said central banks should be wary of raising interest rates just to control inflation.
In a speech at an ECB conference in Portugal, where he noted his differences with the BIS, Summers said the consequences of another recession any time soon would “massively exceed” the problems of prices running slightly hot.
After venturing into uncharted terrain with trillions of dollars of stimulus — and in some cases sub-zero interest rates — to fight the global financial crisis, central banks are in another uncertain situation as they go into reverse.
One flashpoint this year was the surge in US yields and spike in volatility in February, sparked by concerns about inflation and faster Fed tightening.
The BIS has previously warned about froth in markets from excessive valuations.
For Borio, as long as bouts of volatility are contained, they should not block the path to the exit.
“It is important not to become distracted from the normalization path as long as those wobbles remain contained and don’t have an impact on the real economy,” he said.
Borio has previously questioned the evidence for Summers’ theory of secular stagnation, in which the economy is in a protracted phase of weak growth that would explain low interest rates.
The BIS economist has called for an overhaul of thinking on inflation and interest rate-setting in the wake of globalization and digitalization, saying the ability of central banks to fine-tune inflation may have been overestimated.
The BIS, under new leadership since Agustin Carstens became general manager in December last year, did acknowledge a “delicate balance” between moving too slowly and too fast.
It even noted reasons to support a “very patient strategy,” including high global debt levels and questions over how economies will actually respond to the end of ultra-low rates.
“The fragility that we see today, on the financial side in particular, is to a considerable extent the result of an economic recovery that has been far too dependent on central banks,” Borio said.
“That’s why going forward we need a change in the policy mix,” he said.
DECOUPLING? In a sign of deeper US-China technology decoupling, Apple has held initial talks about using Baidu’s generative AI technology in its iPhones, the Wall Street Journal said China has introduced guidelines to phase out US microprocessors from Intel Corp and Advanced Micro Devices Inc (AMD) from government PCs and servers, the Financial Times reported yesterday. The procurement guidance also seeks to sideline Microsoft Corp’s Windows operating system and foreign-made database software in favor of domestic options, the report said. Chinese officials have begun following the guidelines, which were unveiled in December last year, the report said. They order government agencies above the township level to include criteria requiring “safe and reliable” processors and operating systems when making purchases, the newspaper said. The US has been aiming to boost domestic semiconductor
Nvidia Corp earned its US$2.2 trillion market cap by producing artificial intelligence (AI) chips that have become the lifeblood powering the new era of generative AI developers from start-ups to Microsoft Corp, OpenAI and Google parent Alphabet Inc. Almost as important to its hardware is the company’s nearly 20 years’ worth of computer code, which helps make competition with the company nearly impossible. More than 4 million global developers rely on Nvidia’s CUDA software platform to build AI and other apps. Now a coalition of tech companies that includes Qualcomm Inc, Google and Intel Corp plans to loosen Nvidia’s chokehold by going
OPENING ADDRESS: The CEO is to give a speech on the future of high-performance computing and artificial intelligence at the trade show’s opening on June 3, TAITRA said Advanced Micro Devices Inc (AMD) chairperson and chief executive officer Lisa Su (蘇姿丰) is to deliver the opening keynote speech at Computex Taipei this year, the event’s organizer said in a statement yesterday. Su is to give a speech on the future of high-performance computing (HPC) in the artificial intelligence (AI) era to open Computex, one of the world’s largest computer and technology trade events, at 9:30am on June 3, the Taiwan External Trade Development Council (TAITRA) said. Su is to explore how AMD and the company’s strategic technology partners are pushing the limits of AI and HPC, from data centers to
ENERGY IMPACT: The electricity rate hike is expected to add about NT$4 billion to TSMC’s electricity bill a year and cut its annual earnings per share by about NT$0.154 Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) has left its long-term gross margin target unchanged despite the government deciding on Friday to raise electricity rates. One of the heaviest power consuming manufacturers in Taiwan, TSMC said it always respects the government’s energy policy and would continue to operate its fabs by making efforts in energy conservation. The chipmaker said it has left a long-term goal of more than 53 percent in gross margin unchanged. The Ministry of Economic Affairs concluded a power rate evaluation meeting on Friday, announcing electricity tariffs would go up by 11 percent on average to about NT$3.4518 per kilowatt-hour (kWh)