Why a COVID vaccine won’t end the era of easy money

New Zealand had a powerful message for the global economy this week: Don’t get carried away by the good news on vaccine development. Central banks are miles from the exit ramp for the tremendous stimulus they’ve pumped into the economy. If anything, increased support is far more likely.

On Monday, Pfizer and BioNTech were hailed for the “extraordinary” results of their experimental vaccine, sending markets soaring. Investors revived bets on a reflating global economy and even began to sniff out rate hikes. Two days later, the Reserve Bank of New Zealand said there’s a long way to go before a vaccine helps the world get through the COVID-19 catastrophe. In case anyone missed the point, officials rolled out a program offering cheap loans to banks to juice the economy.

To think officials are about to contemplate scaling back is to miss big shifts in monetary practice since the pandemic and lessons from the previous recovery. Expectations of hale employment and hitting inflation targets won’t be good enough this time. Policy makers from Washington to Wellington want to actually see good stuff happen.

For the RBA, the main focus now is jobs, inflation is secondary.
For the RBA, the main focus now is jobs, inflation is secondary.Credit:Louie Douvis

New Zealand’s caution is echoed across Asia. In Australia, the Reserve Bank’s projections last Friday emphasised the hard road ahead. Unemployment will peak a little below 8 per cent around the end of 2020, falling to 7.5 per cent by June, before easing to 6.5 per cent a year later. The main focus is jobs; inflation is secondary. And expectations of price increases have lost some significance.


Inflation has to be actually rising, RBA Governor Phil Lowe says, a break from orthodoxy of recent decades. With a six-month lifespan, the brevity of Australia’s quantitative easing program “almost guarantees that the RBA will not have had time to see any meaningful macro improvement by the time the program is completed,” wrote Ben Jarman, an economist at JPMorgan Chase in Sydney, in a note. “This biases the board toward extension.”

It’s also important not to conflate a pickup in activity with a meaningful uptick in inflation. Deflation is stalking China, the world’s biggest manufacturer and a major exporter. Consumer inflation slowed to below 1 per cent for the first time in more than three years, according to government figures released on Tuesday. Core inflation, stripping out food and energy, was microscopic at 0.5 per cent compared with a year earlier. Factory-gate prices extended their decline. The People’s Bank of China has been more restrained than many peers this year and was showing signs of wanting to get back to a more neutral stance. These numbers make that a tougher sell.

To think officials are about to contemplate scaling back is to miss big shifts in monetary practice since the pandemic and lessons from the previous recovery.

Even something that at first glance looks like a regulatory step is rich with monetary-policy implications. On Tuesday, the Bank of Japan made its biggest move yet to encourage struggling regional lenders to reorganise their businesses with an offer to cushion the impact of negative rates for institutions willing to cooperate. Japan’s 100 or so regional banks face severe challenges that go beyond negatives rates, such as a rapidly shrinking population and technological change. But harm to the sector has been a factor holding back further cuts by the BOJ into negative territory. To the extent this alleviates suffering, it will make further cuts less radioactive.

Let’s not forget the first among equals: The Federal Reserve’s new framework favouring lower rates for longer is the most visible transformation this year. It’s not sufficient for inflation to be forecast to hit 2 per cent, or for it to get there. Officials need to be convinced it will stay there. That means policy now specifically endorses – even welcomes – overshoot.

Vaccine breakthroughs are great. But the vaccine itself has to be distributed and have a demonstrable effect on activity for central banks to be convinced it’s time to consider letting up. In the past, a credible projection might have been sufficient. Not this time.

Monetary chiefs are often accused of getting ahead of themselves. “Jumping at shadows” was a term thrown around when policy began to be tightened in 1994, 2004 and 2015. In this nascent recovery, preemption is out. Under-reaction is in.


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