Produced by Tom Hannen, illustrations by Ulla Puggaard
It used to be cool to be a central bank. The world's central bank chiefs had their feet on the pedals of the world economy. By lowering short-term interest rates, they could make savings less attractive and spending more so. And the economy would rev up. Or they could do the opposite.
After the financial crisis, by pairing low rates with asset purchases, they got banks lending again, boosted asset prices, and avoided a global depression-- or so it appears. Now, however, the world is not acting the way the bankers said it would.
The bankers' theory was that as loose credit helped economies grow and unemployment declined, inflation would rise. Inflation, however, is mostly flat on its back. This is doubly worrisome. A little inflation lubricates the economy. For sectors going slowly, it allows prices to fall in real terms without the pain of nominal cuts. And a prolonged period without wage inflation creates political instability.
Worse, the missing inflation suggests that the bankers' theories might simply be wrong. If so, cheap money may have encouraged high asset prices and high debt levels, which could eventually serve to destabilise the economy without doing much good for growth.
The FT has long argued that low rates are a prudent response to a slow recovery. We still believe that inflation will come if rates are kept low. That inflation has been absent thus far should make everyone less certain about the old paradigm and more open to new ideas.
Bankers and everyone else could be entering a new world. That is the FT View.