Wednesday, December 12, 2012

RBA's Glenn Stevens takes on major central banks

RBA's Governor, Glenn Stevens today took a jab at the four major central banks (Fed, BOJ, EBK, BOE) without naming any names. Here are two key points summarized by Goldman:
1. The rapid expansion of the balance sheets of many central banks has "blurred the distinction between fiscal and monetary policy" and therefore the future exit from these policies which "provide cheap funding for governments may prove politically difficult". Ultimately, while central bank actions have bought government's time to put public finances back on track, central banks cannot solve these longer run challenges.
This is an excellent point. Central banks are called upon to fix structural problems, but all they can do is make sure governments have access to cheap funding for some period of time. At some point these central bank actions become counterproductive, yet any exit from these strategies may prove politically difficult (effectively creating a trap).
2. The expansion of central bank balance sheets has created disquiet in the global policymaking community as it has led to spillovers and distortions at the international level via an acceleration in cross-border flows of capital in search of higher returns. Although central banks are effectively factoring-in these flows into their policy decisions, there is not a consensus on how this should be done and there is an argument that central bank mandates would need to be changed to appropriately account for these spillovers. At the very least, increased global cooperation is optimal on this front.
Here he is referring to the persistent strength in the Australian dollar, which is killing the nation's export sector. He is attributing this strength to other central banks keeping incredibly high liquidity levels and near zero rates - forcing capital to flow to assets like the AUD.

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