We have all experienced that awkward moment during a night out. The lights turn on, the volume softens. You look around: some people are still dancing. The quantitative easing party is nearing its end: the European Central Bank, the Federal Reserve, the Bank of England, the People’s Bank of China, Bank of Japan and Bank of Canada have all signalled a hawkish turn in policy over the past few weeks. Why did central bankers all turn together, and why now?
One reason is improving growth and inflation, but I suspect there’s more. Only the US is close to full employment, while real wages are still stagnating in the eurozone and falling in the UK. Canada is dealing with a property bubble and lower oil prices. China is trying to curb its credit-fuelled stimulus while avoiding a hard landing. A second reason for policy normalisation is to set aside policy ammunition for any future slowdown. But the newest driver may be that the collateral effects of loose policy are becoming more evident and are no longer politically acceptable. “We’re not yet back to where we want to be in terms of ECB monetary policy”, Germany’s Chancellor Merkel said last week. QE prevented a worsening of the crisis, yet it didn’t solve its root causes. Global debt levels are up 276 percent to $217tn, or 327 percent of GDP, according to the Institute of International Finance.
