The debate over monetary policy’s limits is, once again, big news.
In recent weeks, Sir Mervyn King, governor of the Bank of England, and his deputy governor for monetary policy, Charlie Bean, have both questioned the usefulness of more quantitative easing. On Thursday, the Monetary Policy Committee halted bond-buying, suggesting the majority agrees with the Bank’s top brass.
It is clear that the MPC now believes that it is running out of options, at least as far as “normal” policy is concerned.
But what is normal? Sir Mervyn has always considered quantitative easing an orthodox monetary policy. Marek Belka, president of the National Bank of Poland, disagrees.
Mr Belka has a far higher benchmark for what constitutes normal central bank activity.
In the spring, Poland’s central bank raised rates to 4.75 per cent. The decision – which was followed by weaker growth – was widely criticised and was reversed earlier this week when the central bank cut rates. Nevertheless, Mr Belka claimed last month in an interview with the Financial Times that the hike was justified to keep monetary policy orthodox.
For Mr Belka, monetary policy becomes unorthodox once “real” interest rates turn negative. The real interest rate is the central bank rate minus inflation. In Poland’s case, the rate hike shifted the real interest rate to 0.75 per cent because annual inflation was 4 per cent at the time.
There was room for the central bank to stand pat, then. But Mr Belka claimed that the hike hadn’t impaired growth prospects in Poland, anyway.
“At the same time we sent a strong signal that we stick to positive real interest rates,” Mr Belka said during a visit to London. “This does not mean that now the situation is changing we shouldn’t think about changing the course of monetary policy, which most of our MPC are now thinking about.”
Unorthodox monetary policy was, he said, “something that brings about negative consequences.” It was especially important to keep real rates in positive territory in an economy such as Poland, where people don’t save as much as they should.
“We are lucky [in Poland] because all unorthodox measures, as indispensable as they may be at the moment, produce distortions that will have to be unwound in the future.” Mr Belka added that sticking to the signal of positive rates was especially important in the current global environment. “If we can survive the whole global turbulence without resorting to unorthodox measures, then we’ll emerge from that period fundamentally stronger.”
What about the “unorthodox” measures pursued elsewhere? Mr Belka has, like his counterparts in other emerging markets, criticised the Bank of England and the US Federal Reserve for the impact of ultra-loose monetary policy on emerging markets. But he acknowledged that, if they work, “all sins will be forgiven”.
“The key issue is if loose monetary policy sustainably improves the situation in advanced economies.”