For people who pride themselves on being boring and cautious, the rich world?s central bankers have in the past few years proved to be a flamboyant bunch. Responding aggressively to financial panic, recession and the threat of deflation, they lowered short-term interest rates close to zero and many then plunged into the realm of the unconventional, buying government debt and extending vast new loans to banks. For the most part, they have avoided the rancorous disagreement that now consumes the debate over fiscal policy.

That consensus is fraying. Just as it has on the wisdom of more fiscal stimulus, opinion is starting to polarise on monetary policy. At one end are those, including the OECD and the Bank for International Settlements, who give warning that a prolonged period of ultra-low interest rates risks inflation and resurgent risk-taking (see article). At the other are those who side with the IMF, which last week prescribed a course of fiscal retrenchment for the world, softened with a commitment by central banks to extended easy monetary policy and perhaps even more expansion of their balance-sheets.

Who?s right? The rich world does not seem to be on the precipice of deflation. Among the 18 forecasters surveyed monthly by The Economist, none expects deflation in any big economy next year save Japan. Yet that is a far cry from saying that central banks need to shift their attention to inflation. In fact, inflation in 2011 will be lower than this year, the OECD and IMF agree. In most countries it will be well below 2%, a level thought to provide about the right buffer against deflation. And deflation, once entrenched, is fiercely difficult to dislodge, as Japan has found. Deflation remains easily the bigger risk.

But the risks are not uniform, and neither should central banks be in their response. In Japan, where prices have fallen for most of the past decade, the case for more action now is overwhelming. Not so in Britain: though there is plenty of economic slack, inflation has actually been above the Bank of England?s target. Some of this is down to a plunge in sterling and will prove temporary. It may also reflect the success of the bank?s aggressive easing?inflation expectations have edged up a bit. Still, it is too soon for the Bank of England to tighten policy, since the recovery remains fragile. America and the euro zone are between these extremes. America?s recovery faces the headwind of expiring fiscal stimulus at a time when underlying inflation has already slipped to around 1%; outright deflation cannot be ruled out. Inflation is also low in the euro zone, but it?s unlikely to become deflation because prices there are stickier (although some countries may have to endure it in order to become competitive again); the greatest risk is that the area?s weak recovery peters out in the face of fiscal retrenchment and the stresses inflicted on banks by the sovereign-debt crisis. Both the Federal Reserve and the European Central Bank need to make it clear that they will act if inflation or growth fall much further.

Not by central banks alone

But how? With short-term rates at or near zero, central banks? scope for conventional action is limited. That leaves unconventional tools such as explicit promises to keep rates down for a long time, buying more government debt, making larger, longer-term loans to banks and buying foreign exchange. These things are harder to do in practice than in theory. Past purchases of government and private debt have already drawn accusations of political pandering and distorting the allotment of credit. The longer interest rates stay low in the rich world, the more capital will flee to emerging markets where rates have risen to combat inflation. This threatens to create the next batch of bubbles. Another round of quantitative easing is likely to deliver far less of a jolt to private spending than the first effort. So although the central banks still have plenty of tools, these are less effective than they were. Central banks have their role to play in restoring the world to health, but they cannot do it alone. Governments need to be acutely aware of this as they calibrate their austerity plans.

?? The Economist Newspaper Limited