What’s a central bank?
STEVE CHIOTKAIS: Today the Japanese central bank took some measures to slow the rise in value of that country’s currency, the yen against the U.S. dollar. Japan of course was hit hard by an earthquake and tsunami that severely disrupted its supply chain and manufacturing sector. So today’s news of more Central Bank intervening is not at all a surprise. But what about other central banks around the world? You know, the U.S. and Europe are also facing a sputtering economy as well, and global markets this morning are waiting to hear from the Bank of England and the European Central Bank about what they can do.
Reporter Christopher Werth is with us now from London with the latest on all that. Good Morning Chris.
CHRISTOPHER WERTH: Good morning, Steve.
CHIOTAKIS: So, central banks stepping in — what can they do to help the economy?
WERTH: Well, you know, central banks set monetary policy, right? They raise or lower interest rates, they test keeping inflation low, and in some cases try to keep the economy moving along. And that’s what the Bank of England and the European Central Bank are dealing with. Both are meeting today on whether or not to raise benchmark interest rates — and most economist expect that they’ll leave those interest rates where they are, despite the fact that they had more or less pledged to raise them over the next year. There’s even talk they might start buying up bonds again, and that’s the central bank saying right, we’re not seeing the economic growth we need, there’s not going to be any fiscal stimulus, right? Governments are cutting budgets, not raising them, so we’ll try to give the economy a kickstart by keeping borrowing costs low. And we’ve sort of seen a wave of central bank activism over the last few days. Switzerland and Japan have seen their currencies rise as a result of these economic worries. So Switzerland’s central bank has slashed interest rates. And Japan’s central bank — it’s also trying to devalue its currency right now.
CHIOTAKIS: Can it work, Chris?
WERTH: Well, there’s a danger to all this, Steve. Here’s Carsten Brzeski. He’s an economist at ING in Brussels.
CARSTEN BRZESKI: If you really kind of turn the taps open the big risk is inflation. The second risk is that it doesn’t help.
WERTH: He says you have to think of these central banks like fire brigades here. They can put out fires, but they can’t do important things like reform labor markets or balance deficits.
CHIOTAKIS: Any hopes that the Federal Reserve, our central bank here in the U.S., will roll out the fire trucks, Chris?
WERTH: Well, interest rates are already at rock bottom. Brzeski says there’s a big push among investors for Federal Reserve Chairman Ben Bernake to begin a third round of the Fed pumping money into banks to buy up bonds. But again, he says it will have a limited effect.
CHIOTAKIS: Reporter Christopher Werth in London. Thanks, Chris.
WERTH: Thanks, Steve.
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