Central Bankers' Swiss Temple Gets Shakeup in Carstens Regime

(Bloomberg) -- Agustin Carstens is changing the way the Bank for International Settlements doles out advice to the world’s monetary chiefs.

The tone in Basel since the new general manager of the “central bank for central banks” took office in late 2017 marks a shift from its frequent public admonitions for ultra-low interest rates. It now favors a less provocative approach aiming to help them chart the exit from their crisis response.

Judgments in recent years from the BIS, previously led by Jaime Caruana, sometimes jarred with what central bankers on the ground felt they needed to do to revive growth and inflation. That sometimes led to tensions with the institution, according to officials familiar with the matter who spoke to Bloomberg.

Carstens’s response is that it’s the job of research to break new ground, but he also wants to refocus to “serve our stakeholders.”

“I cannot rule out the possibility that at some point our message has been uncomfortable for somebody, but something that has to be made very clear is that our intention is not to create frictions,” Carstens said in an interview on Oct. 23. “At the same time, we should not censor ourselves.”

The new approach coincides with a general global move away from expansionary stimulus, which gives the BIS less reason to push hard its long-held view on tightening policy. But there are other reasons for the shift too.

While the BIS has long called for higher interest rates, its contrarian house view to “lean against the wind” following the recession period was a particular thorn in the side of the European Central Bank, according to two people who declined to be identified discussing confidential matters.

Signs of tension were clear in 2014, when the Federal Reserve and the ECB fired back, saying macro-prudential actions -- themselves a brainchild of the BIS -- were better tools to thwart asset price bubbles than rate policy.

Carstens, who previously ran the Bank of Mexico, arrived in Basel with cryptocurrencies and resilience to cyber attacks atop his agenda, along with a pledge to upgrade the research, with a focus on policy normalization.

Less than a year before, a report co-authored by former Bank of England Deputy Governor Charlie Bean suggested the BIS’s internal culture be more open to challenge and that research shouldn’t be geared toward supporting the house view.

“I want this institution to have a stronger voice, to be more reachable, to be more present in more debates -- there is no doubt about that,” Carstens said. He added there was no “obsession” with supporting the house view and that the research agenda needs to be “very dynamic” and “respond to the moment.”

Closely associated with the BIS’s stance is Claudio Borio, now head of the monetary and economic department, who along with his predecessor William White has for years been urging a greater focus on asset bubbles and a preemptive policy tightening. Yet his opinions are controversial within the economics community.

One skeptic is Stefan Gerlach, who previously worked at the BIS and is now chief economist at bank EFG.

“It has plainly been the case that a number of positions the BIS has been advocating under its ‘house view’ have long been seen as ill founded, perhaps even dubious,” Gerlach said. Coupled with Carstens’s experience and judgment, and the reservations in the Bean report, that “led to the developments that we now see,” he said.

A slight shift in tone was already evident in the 2018 annual report, which called for a “more balanced policy mix,” in contrast to the previous year’s argument that a strategy of gradualism and transparency could encourage risk-taking.

Carstens has since used the metaphor of the “narrow path” to describe the challenges officials face between financial and price stability. More than that, he sees his job to provide any guidance needed.

“The main stakeholders which we’re working for are central banks,” he told Bloomberg. “They need to hear from us about the issues that represent the challenges they’re facing.”

--With assistance from Eric Martin.

To contact the reporters on this story: Alessandro Speciale in Frankfurt at aspeciale@bloomberg.net;Catherine Bosley in Zurich at cbosley1@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Lucy Meakin

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