Monetary policy in the advanced industrial economies

BIS Annual Economic Report  | 
26 June 2006

The overall thrust of monetary policy in the G3 economies remained accommodative, but took a distinctly firmer tone during the period under review. As signs of price pressures accumulated, the Federal Reserve continued to tighten policy with consecutive rate hikes. The ECB began to raise its policy rate, as headline inflation exceeded its target and momentum in economic activity strengthened; in addition, money, credit and asset price developments heightened concerns about longer-term price stability. As deflationary pressures faded, the Bank of Japan announced the end of its unconventional quantitative easing policy but initially left its policy rate unchanged at zero. The Bank also adopted a new two-perspective policy framework distinguishing between short- and long-run risks to price stability. Policies across smaller industrial economies with inflation targets were more diverse, with most central banks tightening. External developments once again played a major role in shaping the policy environment. High oil and other commodity prices fed concerns about worrisome second-round inflationary effects, while at the same time low-cost imported consumer goods raised prospects of underlying inflation running below target.

A special section of the chapter delves further into the implications of greater global integration ("globalisation") for the conduct of monetary policy. While supporting the global disinflation process over the last decade or so, globalisation has also complicated monetary policymaking by altering the policy environment in various ways, influencing traditional policy guideposts and restricting policymakers' room for manoeuvre. Challenges facing monetary policymakers are discussed in the light of such trends.