Business·Analysis

Central bankers move from shadows to spotlight: Don Pittis

Monetary policy is suppose to put you to sleep. Don Pittis asks why the grey men and woman of central banking are suddenly shocking markets and making headlines.

Central bankers are supposed to be boring. What's changed?

Central bankers have shaken markets this week with their stimulus plan. From left, European Central Bank president Mario Draghi, Bank of Canada governor Stephen Poloz and Swiss National Bank chairman Thomas Jordan. (Reuters)

Whoever said monetary policy was supposed to be dull? Well not any more.

It's as if suddenly the backroom boys and girls whose job it is to keep our financial system sound have come out of the phone booth dressed as Superman. Or, depending on how their announcements affected you, a super villain like Dr. Destructo.

In the financial pages, of course, central bankers have always made news. But even there, the role has been more that of a quiet aristocracy or high priesthood, murmuring riddles that their acolytes in the business press interpret for the adept.

An exception to that rule was Mark Carney, who with his media friendly looks and charm, risked making Canadian and then British monetary policy — after he moved to the Bank of England — glamorous. Of course everyone in the central banking brotherhood quickly learned the disadvantages of that once he became perilously close to turning himself and his family into a page one tabloid star. Tut tut.

But now, in a single week, three central bankers have attracted  not just the attention of the business press, but made the top of newscasts and appeared in blazing front page headlines in popular dailies.
A Bank of Canada rate cut made front page news in newspapers across the country on Jan 22, 2015. (CBC)

Shock cut

"Shock rate cut sends loonie tumbling" blared a banner head in Toronto's biggest circulation daily the day after Bank of Canada governor Stephen Poloz's surprising announcement. The national Globe and Mail's headline, "THE CUT," was so big it barely fit across the width of the front page.

The latest to take the stage was European Central Bank president Mario Draghi. Everyone assumed he was going to join the U.S. and U.K. in so-called quantitative easing -- increasing the money supply by buying up bonds. But even he shocked markets by announcing he would buy 10 billion euros-worth more every month than anyone had expected. Bond rates and the euro plunged and stocks soared.

But most startling of all was a sudden and unexpected move at the end of last week that continued to make headlines this week. That was when Swiss central banker Thomas Jordan announced he would no longer hold the Swiss franc peg to the euro. It was like pulling out the supports on a wall being leaned upon by hundreds of institutions and thousands of traders.

Fortunes lost

Swiss tennis player Roger Federer lost a fortune because his money was in euros. Currency brokerage firms around the globe went broke with losses of hundreds of millions of dollars. Swiss exporters and those who depend on tourism were shattered as buying in Switzerland became suddenly more expensive.

Generally, central bankers are not given to showmanship. So why three big splashes in a single week? And they weren't alone. Central banks in Brazil, China and Denmark have also made big moves.  I don't think it's mere coincidence.

During the patching up after the financial crisis of 2008, central bankers have been wary of doing anything that would put nervous markets to flight. "Forward guidance" became the new policy, as the central bankers signalled what they would do in future, reassuring markets that any action would be slow and expected.

But in October of last year, Poloz abandoned the forward guidance principle, calling it "addictive." But besides being addictive, it weakens the impact of any central bank move.

If everyone knows where interest rates and therefore currencies are going next, they complacently trade those currencies and take all the future moves into account. This is not how central bankers have operated in the past.

Sudden moves like those of Poloz and Jordan shocked traders who were complacently betting that the Canadian dollar and the franc would maintain their relationship, respectively, with the U.S. dollar and euro. The expectation that central banks will do something unexpected discourages one-sided sure-thing bets for or against a currency.

Gnomes of Zurich

The other reason that central banks have taken a higher profile may be that governments have lost control and credibility. The Swiss, who used to be the all-powerful gnomes of Zurich, have been overwhelmed by the new power of international banks. Europe is a house divided and could well become more so after Sunday's election in Greece.

The U.S. executive and legislative branches are irreconcilable.  In Canada, the country is also split as Prime Minister Harper's favourite child, the oil producing west, is superseded by the ugly sisters of the industrial east.

Governments are afraid to redistribute wealth, afraid or unable to tax and spend, leaving them powerless to restart the economy. By default, the financial levers, the joystick of the money game, fall to the central bankers -- Super Stephen, Super Thomas and Super Mario.

All of which only make you nervous about what Bank of England's Carney and the Fed's Janet Yellen are planning to surprise us with at their announcements over the next two weeks. If the trend continues, hold on to your hats.

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.

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