The value of independence

Posted by: Paul Donovan

12 Apr 2019
  • Over the past forty years, inflation in developed economies went from high and unstable to low and stable. This was not due to technology (which changes relative prices, not inflation). This was not due to globalization (which raised inflation a little). This was due to central bank independence.
  • Central bank independence is even more important in an era of quantitative policy. Quantitative policy is a useful but dangerous tool. Economists are best placed to judge when it should and should not be used. Financial markets should pay attention to who should be nominated for the two vacant Fed positions.
  • Euro area industrial production data is due. We have already had local data, which takes away some of the surprise. Past numbers were revised up quite significantly in Germany. This matters because nearly all the weakness in manufacturing in developed markets is due to Germany (Italy helped a bit).
  • US import and export prices will not show the effect of trade taxes – those are applied to US consumers and US companies after the goods reach the US. Import prices hint at whether foreign exporters are prepared to absorb some of the taxes. They have not been rushing to do so hitherto.