CENTRAL BANKER REPORT CARDS 2008
ANNUAL SURVEY/ CENTRAL BANKER REPORT CARDS
Contributors: Antonio Guerrero, Anita Hawser and Gordon Platt
History will judge whether the actions taken by central bankers during the past year to rescue financial institutions from the clutches of the credit crunch and to keep systemic risks at bay by pumping huge amounts of liquidity into the financial system will prove to be in the best long-term interests of the global economy and national economies. Unforeseen consequences could take years to emerge.
Even central bankers in countries removed from the immediate fallout of the subprime crisis already have found themselves challenged as never before by the reality of slowing economic growth and accelerating inflation. They could justify cutting rates to keep economies growing or raising rates to keep rising food and energy costs from becoming embedded. Many did both-depending on the latest price reports and other data-and many did nothing. It was almost as if they were frozen in the glare of two powerful headlights.
Recent shifts in energy and commodity price trends and the resurgence of the dollar add new elements to the equations that central bankers rely on to chart their courses. One thing that is clear from recent events, however, is that central banking remains as much an art as a science. It differs from country to country, depending on the circumstances and the monetary tools available. There are common standards of excellence, nonetheless, such as a determination to fight inflation to provide a stable environment for growth and a willingness to make tough decisions in the face of strong political pressures. Passing the buck was easy this year, as virtually every central banker could point to global forces beyond their control as the reason for their own failures. Fortunately, there were enough successes to lead one to believe that central bankers as a whole remain on the right track.
| Countries | Central Banker | Grade 2008 | Grade 2007 |
| Argentina | Martin Redrado | D | D |
| Brazil | Henrique de Campos Meirelles | B+ | B |
| Canada | Mark Carney | C | N/A |
| Chile | José De Gregorio | B- | N/A |
| Mexico | Guillermo Ortiz | B | B+ |
| United States | Ben Bernanke | C- | C |
| Countries | Central Banker | Grade 2008 | Grade 2007 |
| European Union | Jean-Claude Trichet | C | C+ |
| Czech Republic | Zdenek Tuma | B | B |
| Hungary | András Simor | B | N/A |
| Norway | Svein Gjedrem | B | B |
| Poland | Slawomir Skrzypek | D | D |
| Russia | Sergei M. Ignatiev | D | D |
| Sweden | Stefan Ingves | B | A |
| Switzerland | Jean-Pierre Roth | C | B |
| Turkey | Durmus Yilmaz | C | B |
| United Kingdom | Mervyn King | D | D |
| Countries | Central Banker | Grade 2008 | Grade 2007 |
| Australia | Glenn Stevens | B | B |
| China | Zhou Xiaochuan | B- | C |
| India | Duvvuri Subbarao | Too Early To Say | N/A |
| Indonesia | Boediono | Too Early To Say | N/A |
| Japan | Masaaki Shirakawa | Too Early To Say | N/A |
| Malaysia | Zeti Akhtar Aziz | B | A |
| New Zealand | Alan Bollard | D | D |
| Philippines | Amando M. Tetangco Jr. | B | A |
| Singapore | Heng Swee Keat | A | B |
| South Korea | Lee Seongtae | B | B |
| Taiwan | Fai-Nan Perng | A | A |
| Thailand | Tarisa Watanagase | C | B |
| Countries | Central Banker | Grade 2008 | Grade 2007 |
| Israel | Stanley Fischer | B | A |
| Saudi Arabia | Hamad Al-Sayari | B | B |
| South Africa | Tito Mboweni | A | B |
THE AMERICAS
ARGENTINA
MARTIN REDRADO
Grade: D
Martin Redrado lacks just two things to make his tenure a success: credibility and independence. While market analysts continue to decry the inaccuracy of official data, with estimates that official 9% inflation is actually closer to 30%, Redrado sides with president Cristina Fernández de Kirchner in proposing methods for overhauling the statistics agency that remain merely cosmetic. Inflation data is being underreported, critics say, to save on inflation-indexed bonds and boost the administration’s dwindling support. The president and her husband, former president Nestor Kirchner, continue to have a strong hold over Argentina’s economic and monetary policy, making Redrado a political pawn. To his credit, Redrado supports opening controversial debt talks with Paris Club creditors in a bid to regain access to international capital markets. The populist administration has used a recent windfall from high commodities prices to unleash a spending spree, boosting its debt load to around 55% of GDP and prompting a sovereign downgrade. Government subsidies rose 65% year-on-year in first-half 2008 to $6.7 billion, ahead of next year’s midterm elections. Lower commodities prices and higher financing needs could pose important challenges ahead. In exchange for his support, Redrado is rumored to be a candidate for promotion to economy minister.
BRAZIL
HENRIQUE DE CAMPOS MEIRELLES
Grade: B+
Sworn in as central bank president in 2003, Henrique de Campos Meirelles is Brazil’s longest-serving central banker. He has been instrumental in supporting the country’s economic turnaround from a 2001 financial crisis by maintaining prudent and credible fiscal and monetary policies. Much of his success has been focused on the inflation front, in a country where hyperinflation always threatened. When Meirelles took office, Brazil had 30% inflation, while reserves were low and interest rates high. Since then, the central bank has taken vigorous steps to tackle inflation. Meirelles, former president of BankBoston Brazil, acted quickly to curb inflation through a series of interest rate hikes, despite the administration’s concerns over the impact of higher rates on GDP growth. A survey of 100 Brazilian economists in August showed they expect inflation to end the year at 6.44%, compared with their 6.58% outlook in July. Meirelles is confident that the central bank’s 4.5% inflation target for 2008 is within reach, giving him scope to hold off further raising interest rates before year-end. His anti-inflation strategy and responsible policies contributed to Brazil’s upgrade to a long-awaited investment-grade sovereign rating earlier this year. The upgrade was a much-deserved feather in his cap.
CANADA
MARK CARNEY
Grade: C
Mark Carney, a former investment banker at Goldman Sachs, was appointed governor of the Bank of Canada effective February 1 of this year. Apparently unconcerned about establishing his inflation-fighting credentials, the new governor moved quickly to stimulate the stalled Canadian economy by overseeing half-point rate cuts in both March and April. Without giving fair warning to the markets, Carney suddenly shifted his focus to inflation in June, when the price of oil and other commodities was soaring. The central bank’s decision to hold rates steady in June, after it had already signaled a quarter-point cut, was jarring. It is hard to chalk up this example of poor communication to lack of experience, since Carney was deputy governor of the central bank from August 2003 until November 2004, when he was named senior associate deputy minister of finance. By late this summer, with oil prices falling, Carney had toned down his inflation warning. While the central bank says it wants inflation to be low, stable and predictable, its recent actions have added to uncertainty in the markets.
CHILE
JOSE DE GREGORIO
Grade: B-
Whether due to problems inherited from predecessor Vittorio Corbo or because of the fact that he has been on the job only since last December, José De Gregorio is having a tough time living up to the country’s expectations. After all, the central bank chief’s resume showed promise that he would bring high-level expertise to the key post. He not only was deputy governor of the central bank since 2003 and a member of the bank’s board of directors since 2001, but once even headed the ministry of economy, the ministry of mining and energy and the National Energy Commission-simultaneously. Results, however, have been lackluster. Inflation continues to grow at the fastest clip in 13 years. This led the bank to hike its target interest rate to 7.75% in August, its highest level since December 1998. Inflation hit 9.5% in both June and July, more than triple the official target of 3% for 2008. Chilean economists expect inflation to close the year closer to 8%. Mounting inflation is also dashing De Gregorio’s plan to boost exports by maintaining peso weakness.
MEXICO
GUILLERMO ORTIZ
Grade: B
Mexico’s central banker has had to rethink the government’s fiscal and monetary policies to adapt to a US economic slowdown. The fallout from across the border has already begun, with remittances from Mexican workers dropping by 2.2% in first-half 2008 after last year’s record $24 billion. In July the central bank lowered its 2008 GDP growth forecast to between 2.25% and 2.75% from a previous range of 2.4%-2.9%. While falling food and fuel prices are having a positive impact, Guillermo Ortiz has moved to curb mounting inflation. Consumer prices still rose 5.39% in the 12 months through July, the highest rate since late 2004. Results have been slow, despite Ortiz’s price pacts with producers of several basic foodstuffs and the central bank’s decision to raise the benchmark interest rate to 8.25% in August. Investors expect the rate to hit 8.5% by year-end. Ortiz admits his 3% inflation target for 2009 will have to be delayed to 2010. He has, nevertheless, contributed to keeping the economy in growth mode and avoiding further US contagion. To his credit, he has also avoided the temptation of intervening in the foreign exchange market to manipulate the peso rate, instead focusing on the inflation battle.
UNITED STATES
BEN BERNANKE
Grade: C-
Ben Bernanke has painted himself into a corner by trying to please congress and the financial markets instead of getting ahead of the curve and keeping inflation under control. US consumer prices rose by 5.6% in the year to July, the fastest in 17 years. The Federal Reserve has been counting on slower economic growth to bring inflation down as it pumps liquidity into the fragile financial system to avoid a meltdown. The main worry for the US economy, however, is the lack of price stability. The Federal Reserve chairman also set a bad precedent by backing the rescue of Bear Stearns, which could lead to a rise in moral hazard, insulating bankers from the risks for which they should be held responsible. Bernanke was right when he warned in June that the weak dollar was contributing to imported inflation. Dollar policy is in the hands of the Treasury, and not the Fed, but Bernanke failed to follow up on his sensible remarks with even a token increase in rates that could have gone a very long way toward changing the psychology of risk aversion that has kept the credit markets malfunctioning for more than a year. Alan Greenspan’s easy money helped inflate the housing bubble, leaving his successor to face the unpleasant task of cleaning up the mess after the bubble burst. So far, however, Bernanke has failed to demonstrate the leadership needed to counter slow growth and high inflation. All he can do now is pray for oil prices to keep falling and for wage earners not to seek raises that could feed further price rises.
EUROPE
EUROPEAN UNION
JEAN-CLAUDE TRICHET
Grade: C
The Bundesbank clone European Central Bank’s sole mandate is to ensure price stability. By this measure alone it has failed by repeatedly overshooting its formal inflation target. The ECB raised interest rates for the first time in more than a year in July as it stepped up measures to fight inflation even as signs multiplied that growth in the anemic eurozone economy was clearly slowing. The central bank raised its main interest rate by a quarter percentage point to 4.25% following a report that eurozone inflation had reached 4%, or double the bank’s annual target rate. Jean-Claude Trichet has maintained his hawkish stance despite softening economic growth data. Market participants expect the ECB to shift toward promoting growth and away from fighting inflation as energy prices are dampened by the global economic slowdown. So far, however, Trichet has continued to throw cold water on suggestions that a rate cut is under consideration. He says the bank’s governing council is worried that price and wage-setting behavior could add to inflationary pressures through second-round effects. Trichet says the central bank is in a position of permanent alertness.
CZECH REPUBLIC
ZDENEK TUMA
Grade: B
The Czech National Bank cut interest rates this past August for the first time in more than four years. The move came after bank governor Zdenek Tuma warned in late July that a rate cut might be necessary if the soaring Czech crown did not weaken from its record high. The crown has been one of the strongest currencies in the world in recent years. Tuma also noted that growth in the Czech economy is slowing, with gross domestic product forecast to grow 4.1% this year and 3.6% in 2009. While economic growth remains respectable, July inflation picked up again, with consumer prices rising at an annual rate of 6.9%. Tuma said in late August that the next move in Czech rates would depend on the outlook for inflation. He is betting that an economic slowdown and the strong crown will dampen inflation. This could give the central bank enough leeway to cut rates a second time before the end of the year to help boost the slowing economy. With the repurchase rate at 3.5%, borrowing costs in the Czech Republic already are among the lowest in the European Union. Meanwhile, the government’s appetite for joining the euro continues to wane.
HUNGARY
ANDRÁS SIMOR
Grade: B
In a series of three consecutive moves in March, April and May, Hungary’s central bank raised its benchmark interest rate to 8.5%, the highest since February 2005. The Magyar Nemzeti Bank, led by president András Simor since March 2007, cited pressure for higher wages in Hungary, as well as rising prices worldwide. Hungary has some of the European Union’s highest inflation and lowest economic growth rates. The central bank expects the country’s gross domestic product to grow 2.2% in 2008 and 2.6% in 2009. Inflation is running at about double the bank’s target of 3% and is forecast to remain above target until the second quarter of 2010. In reaffirming its inflation target in August, the bank said it strongly believed that the European slowdown would be more severe than expected. “We agreed to keep the inflation target at 3% because we consider this an equivalent of price stability,” Simor said. “It is a level that is sufficiently low to minimize losses from price increases but sufficiently high to reduce risks of deflation and filter out statistical distortions.” He has repeatedly called on the government to reduce payroll taxes, which he says have been kept high to support the country’s lavish welfare and housing subsidies.
NORWAY
SVEIN GJEDREM
Grade: B
Norway’s central bank, Norges Bank, raised its key policy rate to 5.75% in June, extending a series of 16 quarter-point increases that began in mid-2005 from an all-time low of 1.75%. Oil and natural gas account for about 25% of the country’s gross domestic product, and the central bank is also responsible for managing the government pension fund, whose assets are currently valued at approximately $400 billion. Norway’s core inflation rate rose to 2.9% in July, exceeding the bank’s target of 2.5% for the first time since the target was established in 2001. The economy continues to operate at near full capacity, and the labor market is tight. Governor Svein Gjedrem says Norges Bank wants to keep the higher level of inflation from becoming entrenched. The bank’s key policy rate likely will remain at the current level, or perhaps somewhat higher, in the coming year, according to the bank’s latest monetary policy report.
POLAND
SLAWOMIR SKRZYPEK
Grade: D
Slawomir Skrzypek, appointed to head the Polish central bank in January 2007, has failed to live up to the modest expectations many analysts had for him. High-level government officials, including the country’s finance minister and prime minister, have blamed Skrzypek for being too slow and too timid in raising rates to control inflation, which rose to a seven-year high of 4.8% in July. The central bank left rates unchanged in August for a second straight month, apparently hoping that a slowing economy would do its work for it. The economy expanded at a rate of about 5.6% in the second quarter, the weakest since the end of 2005. For his part, Skrzypek says that inflation was caused by increases in global food and energy prices beyond his control. He says the scope of monetary policy tightening under his reign has been appropriate and that any faster tightening would have hurt economic growth. He sounded slightly more hawkish following the August meeting of the monetary policy committee, telling a press conference that the government is being too optimistic in forecasting that inflation will slow to below 3% next year.
RUSSIA
SERGEI M. IGNATIEV
Grade: D
By failing to properly sterilize soaring capital inflows, the Russian central bank, led by the reclusive Sergei Ignatiev, let inflation get out of control. The inflation rate for 2008 likely will be close to 13%, well above the central bank’s generous 8% target level. Meanwhile, the Russian economy has barreled ahead, posting growth of 8.1% in 2007 and close to 8% so far this year. The gains are not only due to soaring prices for the country’s oil and mineral exports, but also as a result of strong domestic demand. Ignatiev has finally scrambled to control inflation this year, with a series of rate increases, higher bank reserve requirements and tighter controls on funds available for lending. The bigger impact, however, is likely to come from the sudden withdrawal of foreign capital following the military conflict with Georgia. The central bank says the country lost more than $16 billion in the week following the August 8 launch of military operations with Georgia. Russia’s currency and stock market have suffered substantial losses since the outbreak of hostilities.
SWEDEN
STEFAN INGVES
Grade: B
Stefan Ingves, governor of the Riksbank, Sweden’s central bank, confidently predicted a year ago that inflation would remain at 2% in 2008. The annual inflation rate reached 4% in May, its highest level since 1993 and double the Riksbank’s target. The central bank raised its repurchase rate by a quarter point to 4.5% on July 3, hours before the European Central Bank raised its own key rate by the same amount to 4.25%. The Riksbank also announced that, despite slower growth in the economy, it was making inflation control its top priority and would raise rates twice more before the year is out. Ingves has made transparency a hallmark of the Riksbank, but his credibility could be threatened by forecasts that seem to be regularly missing the mark. The bank had forecast in April that it would leave rates on hold for the remainder of the year.
SWITZERLAND
JEAN-PIERRE ROTH
Grade: C
The Swiss National Bank has kept interest rates unchanged even in the face of rising inflation. It is counting on a slowdown in economic activity to ease inflationary pressure, with prices rising at an annual rate of 3.1% in July. With exports accounting for more than half of gross domestic product, the Swiss economy is vulnerable to a global economic slowdown. Jean-Pierre Roth, the central bank’s low-key chairman, says there is enough to suggest that the current inflationary trend is of a transitory nature. Roth is keeping a close watch on oil prices, movements in the Swiss franc, the economy and financial markets and says he stands ready to react swiftly to maintain price stability in the medium term. Although the Swiss economy is experiencing a slight slowdown, it likely is robust enough to withstand a small rate increase as insurance against inflation becoming entrenched. While doing nothing in the face of uncertainty may seem sensible, it could turn out to be a flawed strategy in the long run.
TURKEY
DURMUS YILMAZ
Grade: C
The Turkish central bank kept interest rates unchanged at 16.75% in August and forecast that core inflation would decline in the months ahead. Inflation accelerated to 12.1% in July, which was the highest in four years. Central bank governor Durmus Yilmaz, who has missed his inflation target for a third straight year, says he is doing the country’s exporters a favor by keeping interest rates high to protect the value of the Turkish lira and making Turkish goods more expensive abroad. This unorthodox theory could be one reason why the country’s current account deficit continues to expand. Most economists believe that a weaker currency boosts exports. The central bank increased rates in May, June and July but is now counting on falling energy and commodities prices and a slowing economy to nip inflation. After dropping six zeros from its currency in 2005 and introducing the new Turkish lira, the country is ready to issue new bank notes in January 2009 that will drop the word “new” and revert to plain old Turkish liras.
UNITED KINGDOM
MERVYN KING
Grade: D
After bungling the handling of the Northern Rock crisis last year, Mervyn King survived calls for his resignation and was reappointed to a second five-year term as central bank governor beginning June 30 of this year. To his credit, King turned down a $200,000 pay raise, which he clearly did not deserve. Having forecast a year ago that inflation would decline in 2008, King was forced to write a letter to chancellor of the exchequer Alistair Darling in June to explain why inflation had risen above 3%. In July the consumer price index rose at a 4.4% annual rate, a 16-year high and more than twice the bank’s 2% target. Meanwhile, the UK economy has ground to a halt and threatens to topple into recession. The UK, which is suffering a steep downturn in the housing market, has the highest interest rates among the Group of Seven industrialized nations. The Bank of England cut its benchmark interest rate by a quarter point to 5% in April, its third cut since December 2007. That clearly was too little, too late to keep the economy growing. King must shoulder some of the blame for getting the UK economy into its current predicament.
ASIA
AUSTRALIA
GLENN STEVENS
Grade: B
Against a more challenging landscape of slowing GDP growth, weakened consumer and business confidence, a shrinking housing market and rising inflation, Reserve Bank of Australia governor Glenn Stevens is still keeping a cool head. Despite worsening economic indicators, at recent meetings the central bank kept the overnight cash rate at 7.25%. With GDP growth predicted to slow to 2.7% this year, down from 4.3% in 2007, Stevens cannot afford to dent business and consumer confidence with further rate rises, even though inflation is baying at his door. CPI rose 1.5% at the end of the June quarter, bringing year-end inflation to 4.5%. While the increase was “less pronounced” than expected, the central bank believes inflationary pressures have far from subsided. Interest rate cuts are expected later in the year, but for now Stevens is waiting to see if inflationary pressures ease off slightly, giving him more room to maneuver in terms of easing monetary policy.
CHINA
ZHOU XIAOCHUAN
Grade: B-
As inflation inched above 8% in April, some believed that preparations for August’s Beijing Olympics were too much of a distraction from the need for further tightening of monetary policy. More recently, inflationary pressures have eased off, with the CPI expected to hover around 6.6% this year. Further declines are anticipated next year. Real GDP is expected to moderate to 9.8% this year, but having got used to double-digit rates of growth, central bank monetary policy appears to be focused more on sustaining high rates of economic growth than on price stability. Recently, the central banker, Zhou Xiaochuan, has being sending mixed signals. While appearing to relax monetary policy with an increase in its annual loan quota, the central bank also tightened its reserve requirements and raised benchmark deposit and lending rates. The questions now are, just how committed is the central bank to tightening monetary policy, and what level of economic growth is desirable?
INDIA
DUVVURI SUBBARAO
Grade: TOO EARLY TO SAY
As Global Finance was going to press, India’s new central bank governor, Duvvuri Subbarao, was settling into his new job, having taken over from Yaga Venugopal Reddy at the beginning of September. His predecessor had been renowned for his steadfast stance on price stability, but early this year analysts argued that the central bank was behind the curve when it came to reining in inflation, which was running at almost 12%. Perhaps goaded by his critics, in June Reddy waded in, hiking the central bank’s key lending rate by 50 basis points to 8.5%. In July he raised the benchmark rate by another 50 basis points. The shock treatment certainly had an impact, but unfortunately it was negative: GDP growth is expected to moderate to 7.7% in 2008-2009, down from 9% in
2007, while inflation is remaining stubbornly high. Subbarao will have a tough job clearing up the mess Reddy left after his last attack on inflation.
INDONESIA
BOEDIONO
Grade: TOO EARLY TO SAY
Bank Indonesia’s governor for the past five years, Burhanuddin Abdullah, is probably glad he handed over the mantle to Boediono (who goes by only one name) back in May, just when inflationary pressures were starting to cause real alarm at the central bank. Having left rates unchanged since the start of the year, the central bank stepped in and bumped them up by 25 basis points in May to 8.25%. It was the start of a run of monthly quarter-point increases that pushed rates up to 9.25% by early September. Boediono’s progressive action against inflation has so far not borne fruit: High food prices saw year-on-year CPI reach 11.9% in July, which is well above the central bank’s 5%-7% target range, and the bank is now resigned to the fact that inflation will not budge before the end of the year. Boediono hopes that the central bank’s decisive recent actions will help rein inflation back to around 7% next year, though. He acknowledges, however, that economic growth is likely to suffer in the meantime.
SINGAPORE
HENG SWEE KEAT
Grade: A
While 2007 saw the Singapore economy grow at rates normally seen in developing markets, 2008 presents a more sobering story, with GDP on average growing just over 4% in the first half of the year. The Monetary Authority of Singapore’s stated objective of “sustaining non-inflationary economic growth” may be a little more difficult to pull off this year, with CPI inflation in June reaching 7.5% and the central bank increasing its inflation forecast for 2008 to a range of 6% to 7%. However, the MAS anticipates that inflationary pressures will ease later in the year, and central banker Heng Swee Keat believes previous monetary policy tightening measures, as well as its policy of supporting gradual appreciation of the Singapore dollar against the US dollar, has helped minimize the impact of rising inflation.
TAIWAN
FAI-NAN PERNG
Grade: A
Keeping inflation at bay has been the main preoccupation of the Taiwanese government and the central bank for the past few months as consumer prices, particularly food prices, rose. CPI inflation is predicted to increase by 3.29% for the full year 2008. In recent months the Central Bank of the Republic of China has raised the discount rate and reserve ratios on deposits in order to reduce excess liquidity in the system and inflationary pressures. Price stability appears to be at the forefront of Fai-Nan Perng’s mind, but with inflation being driven by external factors, he is conscious that central bank monetary policy is only part of the solution and that other measures, including a government-led price stability program as well as other fiscal measures, are essential. Despite inflationary pressures, real economic growth has not suffered too much, and Taiwan’s economy is forecast to grow by an average of 4.4% from 2008 to 2009.
JAPAN
MASAAKI SHIRAKAWA
Grade: TOO EARLY TO SAY
Having battled deflation for many years, Japan is now faced with rising inflation. It is too early to say whether the Bank of Japan’s new governor, Masaaki Shirakawa, can do any better than his predecessor, Toshihiko Fukui. Higher commodities prices are taking their toll, with the domestic corporate goods price index reaching 4.7% in May. Having sustained interest rates at historically low levels in an attempt to stave off deflation, the central bank now has very little room to maneuver in terms of raising interest rates to normal levels because of the slowdown in global economic growth. Unsurprisingly, for the past few months the central bank has kept the policy interest rate unchanged at around 0.5%. With consumer demand remaining sluggish, external inflationary pressures rising and GDP forecast to grow by a paltry 1% in 2008, there is little the Bank of Japan can do at this stage except to sit tight and see if conditions improve.
MALAYSIA
ZETI AKHTAR AZIZ
Grade: B
With consumer price inflation reaching 7.7% in June, the highest level in 26 years, keeping economic growth on an even keel appeared to be uppermost in the mind of Bank Negara Malaysia when it decided to leave policy rates unchanged. The bank has been reassured by recent declines in commodities prices, which it believes will result in reduced inflationary pressures next year. Zeti Akhtar Aziz has to be applauded for avoiding the tendency to apply the brakes too soon without waiting to see how inflationary pressures play out. So far it has paid off in terms of relatively stable economic growth: The year-on-year economic growth was 6.3% in the second quarter of this year, compared to 7.1% in the first quarter. But with headline inflation inching above 8% in July due to higher food and oil prices and growth forecasts for next year expected to be lower, one has to question whether Zeti has eased off a little too much as part of the bank’s overarching objective to avoid a downturn in economic activity.
NEW ZEALAND
ALAN BOLLARD
Grade: D
Having fought off currency speculators in 2007, the Reserve Bank of New Zealand now has its work cut out battling falling private consumption, slowing economic output, a cooling housing market and rising inflation. It appears Alan Bollard’s previous run of interest rate rises may have gone too far. At 8.25% the official cash rate is already high, and against a backdrop of rising inflationary pressures (year-on-year inflation is tipped to reach 4.7% in September), he has little room to maneuver in terms of stimulating economic growth by cutting rates. Economists have revised their 2008 GDP forecasts downward to growth in real terms of 0.7%. Battling such a difficult internal and external economic climate, Bollard has even questioned whether the widely accepted “inflation-targeting” framework, which governs monetary policy in most countries, is up to the current challenge. Monetary policy may only be able to do so much, but Bollard’s is not doing much at all.
PHILIPPINES
AMANDO M. TETANGCO JR.
Grade: B
Like many central bankers around the world, Amando Tetangco has been battling the twin forces of rising inflation and slowing growth this year. After steadily easing monetary policy into the beginning of 2008, the Philippines central bank (BSP) had to reverse course and, since June, has pushed up rates by a full percentage point. Inflation, driven by rising oil and commodities prices, shot out of the bank’s comfort zone and hit almost 10% year-on-year by the end of the second quarter. The bank is hopeful that its rate rises will bring the beast back under control by the end of the year but is not so optimistic that it will hit its target of 4%. Tetangco showed he is not afraid of being a little heavy-handed when the situation demands it, with a 50-basis-point rise in July to combat the “second round” effects of rises in oil and commodities prices. Markets responded well to the central bank’s bold action. The peso appreciated by 2.6%, reversing a trend of depreciation prompted by widespread concerns over inflation. However, with inflation increasing steadily in the seven months prior to June, arguably BSP could have shown its resolve a little sooner. Fortunately for Tetangco, GDP growth is slowing only moderately despite the rate rises and remains above 5% year-on-year.
SOUTH KOREA
LEE SEONGTAE
Grade: B
South Korea, like other Asian countries, has shown that it is not immune from global inflationary pressures. However, Lee Seongtae’s hawkish monetary policy, based on a succession of rate rises in 2007, even when inflationary pressures were less benign, has stood the economy in good stead. Inflationary pressures are likely to affect economic growth, with GDP growth forecasts revised downward to 4.4% for 2008. While some members of the Bank of Korea’s board were entertaining the notion of a rate cut earlier in the year to stimulate growth, in August the bank’s monetary policy committee decided that domestic demand was sluggish and inflation persistently high enough for it to raise the base rate by 25 basis points to 5.25%.
THAILAND
TARISA WATANAGASE
Grade: C
The Thai government’s pursuit of a growth-targeting strategy is at loggerheads with the central bank’s inflation targeting regime. So when Tarisa Watanagase hiked rates by 25 basis points to 3.5%-the first rise in two years-back in July, after headline inflation hit a 10-year high of 9.2%, the finance ministry called for Watanagase’s head. The crisis was only resolved when the king of Thailand intervened in support of the central bank governor. Despite some easing off in oil prices, in August inflation remained enough of a threat that the bank decided to raise rates by another 25 basis points to 3.75%. Some have argued that Watanagase’s tightening was too little, too late and that the central bank governor had become too accustomed to a low-inflation, high-growth scenario. Certainly, the succession of recent rate rises has been hugely unpopular with the general public and politicians alike.
AFRICA & THE MIDDLE EAST
ISRAEL
STANLEY FISCHER
Grade: B
Governor of the Bank of Israel Stanley Fischer has had his ups and downs this year. He started the year by raising the base interest rate by a quarter point to 4.25% effective in January. He then cut the rate by a half point in March and a quarter point in April before reversing course and raising the rate again in June, July, August and September by a quarter point each, bringing it back up to 4.25%. Since the beginning of 2008, inflation has been above the central bank’s target range of 1%-3%, and Fischer said in August that inflation was unlikely to return to the target zone for about another year. He said the rate reductions earlier this year may have caused inflationary expectations to increase. He has clearly struggled with the contrasting goals of keeping the economy growing while containing inflation. So far, the economy has remained relatively strong, but growth is clearly slowing. For the time being at least, Fischer apparently believes that inflation is the greater threat.
SOUTH AFRICA
TITO MBOWENI
Grade: A
Tito Mboweni, governor of the Reserve Bank of South Africa, says the duty of a central banker is to keep inflation under control, not to win a popularity contest. After raising the repo rate to 11% in December 2007, he increased it another half point in April of this year and once again in June, bringing it up to 12%, a level that was maintained in July and August. South Africa’s consumer price index, the CPIX, which excludes mortgage costs, rose 13%, year over year, in July. That was well above the central bank’s 2%-6% target range. Mboweni, a prominent activist in South Africa’s anti-apartheid movement and labor minister in Nelson Mandela’s administration, has been criticized for his tight monetary policy. Jacob Zuma, the African National Congress (ANC) governing party’s new leader, has called for the dismantling of the bank’s inflation targets. Mboweni’s reply has been that inflation takes its greatest toll on the poor and that the Reserve Bank cannot afford to be cutting rates when inflation is so high.
SAUDI ARABIA
HAMAD AL-SAYARI
Grade: B
Hamad Saud Al-Sayari has been governor of the Saudi Arabian Monetary Agency (SAMA) since 1983, which says something about his political savvy and staying power. He has been challenged recently, however, as never before as inflation has become a major problem in the kingdom. The consumer price index for July rose to a record 11.1%, year over year, due mainly to rising food and housing prices. Under the fixed peg of the Saudi riyal to the dollar, SAMA’s monetary policy tools, especially interest rates, have largely followed those of the Federal Reserve. To maintain the dollar peg while fighting inflation, SAMA has focused on tight liquidity ratios for the banks to discourage lending. The decline in the dollar until recently exacerbated an increase in prices of imported commodities. Now that the dollar is recovering, however, it could become easier to maintain the peg. The real question is whether SAMA will be successful in bringing growth in the money supply under control with the limited policy tools at its disposal.
