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Central banks grapple political reprisal amidst mounted easing

FXstreet.com (Barcelona) - In light of recent events, Central banks are grappling new expectations for monetary policy that may be hard to reverse as they slide deeper into the realms of fiscal policy. In particular, to lift their economies from debt crises or anemic growth, the Bank of Japan is uniting with a new government by aiming to lift inflation to 2% by 2015, and the European Central Bank stands ready to purchase bonds of stressed nations. Moreover, the Bank of England now has more room to ignore price pressures and is discussing with politicians how to ease credit further, while the Federal Reserve has extended more than $1 trillion worth of unprecedented credit to a single industry: housing.

A plausible defense for fiscal activism is that monetary authorities need to protect their inflation goals from the possibility of Japanese-style disinflation if governments don’t boost demand. The risk is they’re left doing the work of those governments – or even financing them, generating precedents they may be pressured to extend or repeat in the future.

“Central banks have to be very careful in what they’re doing,” noted Axel Weber, chairman of UBS AG. “There is a challenge that their independence may be undermined simply because they’re getting closer to fiscal policy and politics.” Weber resigned as president of the Bundesbank in 2011 partly because of his opposition to the ECB’s purchase of sovereign assets.

The role of central banks will be front and center in Washington this week when officials gather for the spring meetings of the International Monetary Fund. Maintaining independence is key to controlling inflation expectations, the IMF said April 9, and in an April 11 report, it urged authorities to remain vigilant to negative side effects from what it called their “unprecedented intervention.”

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