What next for central bankers?
The machinations of central banks were once conducted in near-anonymity and of interest only to a small band of finance specialists. Now they are both political and highly public. With ultra-low interest rates representative of the “new normal”, what are the chances of a return to the low-key status quo that endured for so long?
John Nugée, Laburnum Consulting
Harold Wilson is once said to have remarked “A week is a long time in politics”, putting his finger on the fact that things can change suddenly, no matter how certain they may seem. The life of a political commentator is full of late night revisions to articles as events develop and careers rise and fall at breathtaking speed.
Not so the life of a writer on central banking. For central bankers and those who analyse their activities, events usually unfold at a slower, more measured pace. Crises come and go, but the essence of central banking is slow to change. There is a sense that even quite substantial policy regime shifts are merely deviations from some pre-ordained norm and that, in due course, life will “return to normal”.
Financial markets and investors like this. There is comfort in the belief that however difficult markets are right now, they will in due course return to more orthodox and understandable patterns. Investment managers assess how and when this will take place, and position assets accordingly.
But at some point, the reality sinks in: the world really has changed, there will be no return to the status quo ante, that where we are now is indeed the new orthodoxy. In short, central banking has moved to a “new normal”. And then everyone — investors, commentators, central bankers themselves — has to accept this and work out what it means.
As we approach the eighth anniversary (in March 2017) of the Bank of England’s historic decision to lower interest rates to 0.5%, it is probably time to accept central banking is in a new paradigm and that the ultra-low interest rates we have experienced since then — 0.25% at the time of writing — are no longer an aberration that will be rectified in due course but the shape of things to come for the foreseeable future.
Central bankers seem to have finally accepted this. At two major conferences last summer — the European Central Bank meeting at Sintra in June and the meeting of the US Federal Reserve (Fed) at Jackson Hole in August — there was much discussion about the changing role of central banks and how permanent the “crisis response” to the Great Recession of 2007-09 would be. This is not the first time this point has been debated, of course, but for the first time the general consensus appears to have been that where we are now is indeed likely to be the pattern for many years yet.
What does this mean for investors? On the one hand, it probably means that the era of very low interest rates, and correspondingly low annuity rates for those seeking to create a pension, will continue. Of all the world’s major central banks, only the Fed is considering raising interest rates — and it is being extremely cautious and deliberate about actually doing so.
It is also probable that central banks will maintain their very large balance sheets and active involvement in markets and financial assets. This in turn means current market levels may be more sustainable than the doomsayers predict, and that anyone waiting for a fall in prices to provide a buying opportunity may be disappointed. The old maxim that market timing is a losing game and that it is better to be fully invested is likely to prove true once more.
For central bankers themselves, it is likely to postpone even further their return to relative anonymity. Gone are the days when the actions of the central bank were reported briefly on the business pages and followed only by a small band of specialists. The modern central bank governor is a prominent figure, and his or her actions are as much political as financial.
In part this is inevitable, given that their decisions on interest rates and markets affect so many people — redistributing wealth from savers to borrowers. But it also reflects two other factors: firstly, there is no obvious exit strategy for central banks, as the discussions at Sintra and Jackson Hole seem to have concluded. And secondly, even if there was, it suits their political masters very nicely to have central bankers so active. Finance ministers with limited room to use fiscal policy are more than content to let their central banks undertake the heavy lifting to keep economies alive.
And at least one central bank governor seems to have realised this and even welcomed it. Mark Carney, the Governor of the Bank of England, has always been a political governor — for him, the post is clearly a stepping stone in a career that will no doubt at some stage return to Canadian politics. Initially he asked for, and was granted, a let-out from his eight-year contract which would enable him to step down after five years. Now, he seems to be enjoying the limelight (even the criticism over his “political” role in the EU referendum) so much that he is talking openly of serving a full term.
Investors have fair warning. The era of ultra-low interest rates, of active central banks, and of prominent and political central bankers, will be with us for some time yet. And in the UK, central banking will probably continue to speak with a Canadian accent.
John Nugée is an independent commentator on financial, economic and political issues (www.laburnum-consulting.co.uk). The major part of his career was spent at the Bank of England, where his last post was as Chief Manager of the Reserves.
This article first appeared in Rathbones Review Winter 2016