Central banks: A long way from decoupling

by Stephanie Flanders

BBC
February 7, 2012

When the financial markets started to perk up in the last few weeks of 2011 it was easy to see what was driving the turnaround: good economic news out of the US, and a shedload of cheap medium-term loans for banks from the European Central Bank.

Since then there has been more good news from the real economy - especially in the US but also the core Eurozone economies and the UK.

The impact on stock prices is plain for all to see - and, possibly temporary. The implications for central bankers are more complicated, but they will be hanging over them for some time to come.

First, those soaraway stock markets. There have been some market wobbles this week, thanks to Greece, but the FTSE 100 is still more than 5% up on the end of 2011, and nearly 17% on its low point in mid-August.

The key American index - the S&P 500- has gained 6.5% so far this year, and more than 20% since October.

As you know, bond prices (and the implied cost of borrowing for governments) have also reflected the better mood - at least if the government in question is not Portugal.

Italy's cost of borrowing is now around 5.6%, the lowest it has been since October.

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