Eclectica’s Hugh Hendry is criticizing European Central Bankers for their intention to increase interest rates this year. In a Financial Times article, Hugh Hendry states that this is the wrong time to increase policy rates. Financial markets in England priced in a quarter point rate increase by May and another quarter point increase by October. Here is what Hendry says:
“European long/short fund is running its most bullish risk exposure in many years and is feeling ebullient regarding the rising tide of corporate profitability as businesses pare back employment levels. My grumble is that I suspect the omnipotent powers of my peers’ central bankers might be found wanting just when they are needed most.
“For the shadow of policy error lurks once more. The European Central Bank’s president even proclaimed his satisfaction with his bank’s decision to raise rates back in the cauldron month of July 2008. I salute him for his willingness to subject the bank’s decisions to open scrutiny. But tightening monetary policy amid the deepest economic crisis of the past 50 years was perhaps not his institution’s finest hour. And with headline inflation rates being boosted by relative price rises in the commodity sector, as Chinese policymakers continue to plug 10 per cent into their GDP calculators, another poorly-timed rise in European rates cannot be so easily dismissed.”
Hendry goes on to say that the ECB has raised its rhetoric to such an extent that financial markets are now expecting a rate increase by the end of the summer.
Low interest rates transfer wealth from savers to borrowers. Central banks justify this unjust wealth transfer by claiming that they can produce more stable and higher growth rates by moving interest rates up and down based on their judgment. Considering the current economic doldrums are a direct result of years of low interest rates and irresponsible monetary policies, we don’t have full confidence in the central banks’ (or Fed’s) ability to deliver on their promises.
Hugh Hendry isn’t confident about the ability of central banks either. However, it is a bit ironic that he criticizes central banks about their past policy failures and then proceeds to give policy directions that will potentially benefit his financial bets. We believe central banks should keep their intervention to a minimum and reverse the ridiculously easy monetary policies. We should stop exploiting responsible savers to pay for the sins of borrowers.