New round of quantitative easing on the cards after Japan's move
Published 07/10/2010 | 05:00
SPECULATION mounted yesterday that central banks around the world are preparing to loosen monetary policy, after the Bank of Japan unexpectedly lowered interest rates on Tuesday.
Japan's central bank said it would expand its balance sheet, following moves by the US Federal Reserve towards more unconventional easing.
European Central Bank president Jean-Claude Trichet may signal today whether emergency measures designed to support banks through the financial crisis will be removed.
Bank of England officials will also consider further stimulus today, while the central banks of Australia, Canada and New Zealand are among those now holding fire on further interest-rate increases.
However, the Nobel prize-winning economist Joseph Stiglitz warned yesterday that the ultra-loose monetary policies being pursued by the Federal Reserve and the European Central Bank were throwing the world into "chaos", rather than helping the global economic recovery.
He said a "flood of liquidity" from the Fed and the ECB was bringing instability to foreign-exchange markets, forcing countries such as Japan and Brazil to defend their exporters.
"The Fed is creating all this liquidity with the hope that it will revive the American economy," Stiglitz said. "It's doing nothing for the American economy, but it's causing chaos over the rest of the world."
The US dollar has weakened about 6.5pc against a basket of major currencies since the start of September as prospects for further monetary easing by the Fed have led investors to seek higher returns elsewhere.
The renewed push for easier monetary policy comes as the IMF warns that growth in advanced economies is falling short of its forecasts.
Analysts say the dilemma for policy makers is that their actions may do little to revive growth and could end up roiling currency markets.
Group of Seven ministers will gather in Washington tomorrow on the sidelines of the IMF's annual meetings. Currency issues will be discussed.
The Daiwa Institute of Research argues that Japan is now engaged in a "vicious spiral" of monetary easing with the US as both compete to bolster their economies.
"The BOJ's next moves will depend on the Fed," said Maiko Noguchi, an economist at Daiwa in Tokyo. "The bank will have no choice but to steadily take easing measures."