Its time to start raising interest rates, writes breakingviews.com columnist Edward Hadas this week. The signs of financial excess are already evident in escalating prices for Chinese real estate and commodities. These nascent bubbles should be nipped in the bud before they burst and trigger another bout of financial and economic havoc, Mr. Hadas advises world leaders attending this weeks World Economic Forumconference in Davos.
The next bubble to go bust could be the one from which there is no recovery. Or, if there is a recovery, it could beway more lengthy and painful than the current one. Governments pretty well used up all their ammunition averting the last bust as highlighted by current near-zero interest rates and the biggest budget deficits since WWII.
Hadas callfor an early tightening of monetary policy is another demonstration, in my opinion, of a new mood in the land. The world leaders meeting in Davos this week may not emerge with an agreement to raise interest rates, but the era of Greenspan-style monetary policy does really seem to be over.
One would expect central bankers to be more aware of asset prices this time around in the setting of policy (the price stability rule tied to just consumer prices was not enough). And central bankers are probably aware that there isnt much left in the tank to fight the next crisis. The solution is to keep manias from forming in the first place
Hence, the outlook for this decade would seem to be quite different from the last two. The 2010s may indeed unfold as ECRI managing director Lakshman Achuthan has envisioned, with higher cyclical volatility, lower trend growth and more frequent recessions.
In Canada, I wonder if interest rate hikes will arrive sooner than most expect. There are already worries over house prices going up too far too fast (prices in many cities are now above pre-recession peaks). And as Douglas Porter, deputy chief economist for BMO Capital Markets, warned recently: the Canadian housing market will only get hotter in the spring as people rush to buy ahead of the new HST in Ontario and B.C. and in anticipation of interest rate increases.