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Cyprus Central Bank Governor: World On Its Way To Recovery

Cyprus Central Bank Governor: World On Its Way To Recovery
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Δευ, 29 Μαρτίου 2010 - 17:45
Central banks in Europe and the U.S. have taken decisive action in response to the global financial collapse, and appear to have succeeded in averting a severe depression and deflation, Cyprus Central Bank Governor Athanasios Orphanides said Saturday.
Central banks in Europe and the U.S. have taken decisive action in response to the global financial collapse, and appear to have succeeded in averting a severe depression and deflation, Cyprus Central Bank Governor Athanasios Orphanides said Saturday.

"Although uncertainty remains, the world economy today seems to be on its way to receovery," Ophanides said in remarks prepared for delivery to an international monetary policy conference at the U.S. Federal Reserve Board.

Orphanides praised actions by central banks that have cut short-term interest rates to near zero, saying central bankers took "appropriate and effective policy easing on both sides of the Atlantic ."

While Orphanides acknowledged that there are challenges posed for monetary policy makers when short-term rates are near zero, he said the fact that real interest rates are so low partly reflects the success of central bankers in battling inflation to low levels.

Orphanides also cautioned against viewing near-zero rates as inherently inflationary, saying that at even rock-bottom levels, rates may need to be lower to combat deflation.

"Near-zero policy rates that may be considerably expansionary in an economy with high inflation could be contractionary when inflation is too close to zero, or worse, deflation has set in," he said. "In a deflationary economy, even zero rates can be contractionary."

Nor should central bankers worry that if they cut rates to near-zero levels, they will have no tools left in their arsenal, Orphanides added. He said the notion that central banks need to hold back on cutting rates to very low levels in order to have some ammunition left can result in rate cuts that are less aggressive than what is needed to stimulate a slumping economy. He said holding back when aggressive rate cutting is needed could be counterproductive, resulting in slumping demand and even deflation.

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