By signaling hawkish policy intentions that went beyond the market consensus, the Bank of England did more than convey its updated views on the U.K. economy and the prospects for monetary policy tightening.
It also highlighted the ongoing gradual shift by central banks in advanced countries toward less stimulative policies.
This evolution makes sense, given domestic economic conditions. It is not sidetracked by the current bout of market volatility. But it also raises interesting system-wide questions that have no definitive answers, at least yet.
The BOE on Thursday followed some of its peers in other countries by raising projections for economic growth. In commenting on the policy implications, Governor Mark Carney said that “it will likely be necessary to raise interest rates to a limited degree in a gradual process but [my emphasis] somewhat earlier and to a somewhat greater extent than what we had thought in November.” That compelled markets to rush to revise up their expectation of a rate hike in May, which led to an appreciation of the pound.
Although they reflect mainly domestic considerations, the BOE’s economic and policy signals confirm two messages that other central banks have also put forward: The world continues to benefit, at least in the short-term, from a synchronized pick-up in economic growth. And the ongoing bout of market volatility is not expected to have an adverse impact on economic activity.
All of this is consistent with a bigger, albeit gradual and careful, shift in the paradigm that applies to central banks in advanced countries as they move away from the stimulative monetary policy that has been implemented for years using unconventional measures. The BOE comes second to the Federal Reserve on this journey, with the European Central Bank and the Bank of Japan at the rear of the lineup.
This change shows greater confidence in the advanced world’s growth prospects, as well as in the ability of central banks to exit in an orderly fashion what has turned out to be a prolonged reliance on measures that risk collateral damage and unintended consequences. It also is evidence of faith in the underlying resilience of the financial system, and in the prospects for improving fundamentals to validate elevated asset prices over time.
But it also comes with a major uncertainty. No one knows for sure how the global economy and certain financial markets will react if several systemically-influential central banks withdraw exceptional stimulus at the same time.
The favorable recent experience of the Fed -- specifically, the orderly halt of its asset purchases, raising rates several times, getting the market ready for three more hikes in 2017, and putting forward a plan for balance-sheet reduction -- shows that a “beautiful normalization” is possible for the most powerful and influential central bank in the world.
Yet no one knows for sure how the system would respond if several of its systemically-important counterparts were to follow this path.
Given the current policy cautiousness of the ECB, the BOJ and the People’s Bank of China, this is not an immediate issue for the global economy and markets.
Looking forward, the hope is not that this concern would dissipate because these central banks feels comfortable easing off prolonged reliance on unconventional measures.
Rather, it is that the collective implications of such action would become less worrisome because the global economy is doing even better in terms of both actual and potential growth.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He was chairman of the president's Global Development Council, CEO and president of Harvard Management Company, managing director at Salomon Smith Barney and deputy director of the IMF. His books include "The Only Game in Town" and "When Markets Collide."
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