Central bank battle

Is cheap money driving up prices?

Cheap money pumped out by central banks has sparked a speculative frenzy in the commodity sector that has driven up prices for everything from gasoline to Corn Flakes.

Or it hasn’t, depending on who you ask.

It’s become one of the most critical economic debates facing the world, and it’s pitted the Bank of Canada against Japan’s own central bank. Last week, a BoC study concluded “financial speculation seems to have played a modest role” in rising commodity prices,” and that “the available evidence points to global demand and supply conditions” as the real cause. That’s in contrast to a report published three months ago by the Bank of Japan. While demand from emerging economies has driven prices, the BoJ admitted, “speculative investment flows…have amplified the intensity of the price surge.” And the jump in speculative money can be tied directly to lax monetary policies, it said.

Maybe the faceoff simply comes down to perspective. Resource-rich Canada will benefit enormously if the rise of commodities is in fact due to a permanent shift in demand. With almost no resources of its own, Japan can only hope that as central banks tighten the reins, speculators abandon their bets on commodities, and prices finally fall back to Earth.

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