For central bankers, transparency may have its limits

PUBLISHED : Monday, 12 August, 2013, 12:00am
UPDATED : Monday, 12 August, 2013, 3:13am

Everyone is for increasing transparency, even central bankers. Just this month, European Central Bank chief Mario Draghi reaffirmed his commitment to "forward guidance", a new policy he has introduced to the bank. He promptly informed markets that he intended to keep interest rates low for "an extended period". He was followed by the new Bank of England governor Mark Carney, who has vowed to do the same until British jobless rate falls below 7 per cent.

Both were acting in response to their American counterpart Ben Bernanke, who might have been a tad too transparent last month when he talked about tapering - or phasing out the Fed's massive bond buying to keep rates low. He was so precise as to give a timetable: subject to improving economic conditions, it may start at the end of this year and end by the middle of next. That spooked markets around the world and caused the only major correction so far this year.

Data about the US economic recovery and the latest quarterly company earnings have been lacklustre. Yet most developed markets have recovered. By their twisted logic, so-so economic improvement in the US is good news because it is seen as a reason for the Fed not to hurry into tapering.

Bernanke's predecessor Alan Greenspan had a reputation of speaking like an oracle. Not Bernanke. The Fed chairman prefers more direct communication. By being transparent, central bankers usually mean inflation targeting. Like the Bank of Japan, Draghi has said he targets 2 per cent inflation. He also plans in future to follow the example of the US Fed to release the minutes of policy meetings.

But transparency can cut both ways. During the financial meltdown, the Fed's priority was to reinforce market confidence and trust in the system. It did so effectively by making moral hazard its official policy. Savers were punished; speculators borrowing cheap money had a field day.

The Fed has been transparent about tapering. But that's just one part of the equation. Eventually, it will have to unwind assets from its massive bond buying programmes. The disposal of such assets must be done with no transparency in their timing so as not to reward some and punish others.

There is a limit to clarity as to what the world's major central bankers can say. After all, Draghi didn't say exactly how "extended" this period of low interests would last. There is a necessary, even justified, vagueness in transparency.