Central bank cooperation better since 2008 – Fed’s Duke

By Central Bank News

Collaboration among the world’s central banks has improved since the 2008 financial crises, said U.S. Federal Reserve Board Governor Elizabeth Duke, and she expects this spirit of cooperation to continue in the future.

But while central banks benefit from coordination and cooperation, adopting the same stance on monetary policy is not always the best choice, said Duke, who addressed a conference in Mexico City the same day Banco de Mexico kept interest rates steady due to inflationary pressures.

In her speech, Duke recalled the coordinated interest rate cuts by major central banks in October 2008 as the effects of the credit crises were deepening worldwide. This was followed by moves to improve liquidity at financial institutions and currency swap arrangements by the Federal Reserve with 14 foreign central banks to ease pressures in dollar funding markets.

“The success of these swap lines in alleviating funding pressures and reducing interbank borrowing rates is a testament to the benefits of central bank cooperation,” Duke said, adding:

“Indeed, closer ties and more-open lines of communication across central banks are some positive outcomes of these difficult times. This spirit of cooperation should continue as our respective central banks work to pursue monetary policies appropriate for our own economies while supporting stable financial systems around the world.”

The latest example of cooperation among central banks is the effort to tackle the problems posed by the benchmark Libor interest rate system, which major central bank governors will discuss at their bi-monthly meeting at the Bank for International Settlements in Basel, Switzerland, on Sept. 9.

Duke said cooperation among central banks is indeed one of the ways that each central bank can attain their own mandates in an age of global financial integration when problems in one country can quickly spill over to other countries.

She said Mexico’s economic recovery in the second half of 2009 had less momentum that in other Latin American countries, which meant the Mexican central bank didn’t consider it necessary to raise interest rates as other central banks in South America.

“These developments underscore an important point–that while central banks may benefit from coordination and cooperation, taking the same policy stance at the same time typically will not be the best choice for all central banks,” Duke said, adding:

“Accordingly, it is imperative for each central bank to have monetary policy tools to appropriately address domestic objectives independent of the actions of other central banks.”