Is it time for central bankers to unwind their policies?

Some central bankers, especially Japanese ones, have faced challenges for a much longer period. For others, especially the European Central Bank (ECB), the challenges may get more severe. But for some, notably in the UK and US, one can now see a period ahead, possibly quite soon, where the need for central bankers to continue with recent policies is coming to an end.

However, there have been notable costs from these policies, especially for savers, who have been penalised by very low potential returns. This is why the time is right to think about ending these extraordinary policies.

It has been argued that the generosity of central bankers may have encouraged a degree of risk taking, or even recklessness, in some quarters; and could recreate the same sorts of problems that caused the recession. The evidence to support these claims, in the US at least, is limited, given the rise in the personal savings rate to more than 5pc today from close to zero prior to the crisis, and the halving of the current account balance of payments deficit.

In the UK, the current account deficit has got worse, although this is partly due to complex valuation issues for our external assets and liabilities that come with being a big financial centre.

Before the crisis, it was generally accepted that central banks should gear their monetary policies towards maintaining low inflation. However, I have shared platforms with many leading research staff, agreeing with them that perhaps central banks should also have targets for overall financial conditions too.

With the economic recovery in the UK and US now so well developed, despite low inflation, the case for central banks to think more cautiously has strengthened. It has become increasingly fashionable for central banks to argue that there is no need for a shift in monetary policy until wages start to rise. Hgher wages might be a desirable thing for our societies, but only if it is associated with higher productivity.

What is clear is that economic recovery is more entrenched, unemployment has fallen - consierably so, in the case of the UK - and financial conditions are extremely buoyant.

While many suggest interest rates might need to be much lower than in the past, there is a lot of evidence they should be close to the sustainable real economic growth rate adjusted for inflation, when the economy is at full employment.

Current interest rates in the UK and US are clearly below that.

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