Monetary policy in the advanced industrial countries

The stance of monetary policy in the advanced industrial countries became less accommodative during the period under review, although the overall stance remained supportive. The Federal Reserve further raised its policy interest rate early in the period and then kept it on hold, despite lingering concerns about upside inflation risks. The ECB significantly reduced the degree of policy accommodation during the period as economic activity picked up, economic slack diminished and money and credit grew rapidly. Using its newly adopted two-perspective policy framework to explain its actions, the Bank of Japan ended its zero interest rate policy with two modest moves during the period, arguing that the ongoing recovery had gained sufficient traction, that underlying inflation fundamentals had strengthened and that maintaining a near-zero interest rate environment had raised medium-term risks of unsustainable investment trends. In smaller advanced industrial economies with inflation targets, there was a general tightening of monetary policy in the face of a diverse set of domestic and external forces, including uncertainties about the global outlook, dwindling slack, high commodity prices, robust money and credit growth, and strong capital inflows.

The evidence of rapid growth of monetary and credit aggregates has been attracting considerable attention, but there are varying central bank perspectives about the monetary policy implications. Some central banks assign prominence to the aggregates while others are more sceptical about their relevance. The stakes of the debate are high. Assigning too much weight to the aggregates runs the risks of overreaction and confusing the public about the central bank's priorities. Too little weight could leave central banks behind the curve with respect to inflation or insufficiently attuned to the possibility of boom-bust economic fluctuations. Even though the issues surrounding the debate are far from resolved, the ongoing evaluation of the appropriate role of monetary and credit aggregates in the conduct of monetary policy is helping to clarify the monetary policy challenges facing central banks.