BIS 75th Annual Report
IV. Monetary policy in the advanced industrial economies

27 June 2005

With the US economic expansion continuing strongly and risks shifting towards possible inflationary pressures, the Federal Reserve began reducing the degree of accommodation in a series of measured increases in the federal funds rate target. The ECB kept its policy rate unchanged as sub-par economic growth and the appreciation of the euro continued to hold back inflationary pressures. The Bank of Japan held its policy rate at zero as economic and financial headwinds proved sufficiently strong to rule out an end to deflation. Implementation of its quantitative easing policy became more complicated as changing liquidity demands emerged. In short, then, the stance of monetary policy in the G3 economies remained accommodative in the period under review. Policies across smaller industrial economies with inflation targets were more differentiated, with some central banks choosing very accommodative policy stances while others moved to more neutral settings. External developments, especially movements in the prices of oil and other commodities, dominated the last financial year. There are some striking parallels between current developments and movements in the late 1960s and early 1970s: a special section of the chapter therefore reviews the historical record and seeks to clarify the risks monetary policymakers might now face.