Stimulating growth threatens stability, central banks warn---collected from foreign newspaper
Monetary stimulus is not the answer, says the Bank for International Settlements in Basle, after share prices plunge
Central banks have done as much as they safely can to rebuild the world economy, and the onus is now on politicians to create the conditions for a stronger recovery, according to the Bank for International Settlements, the central bankers' club.
In its annual report, published on Sunday, the bank, based in Basle, Switzerland, warns that with unprecedented stimulus already in place, fresh action from central banks to kick-start growth may do more harm than good, by distorting financial markets and jeopardising stability.
"Unfortunately, central banks cannot do more without compounding the risks they have already created. Monetary stimulus alone cannot put economies on a path to robust, self-sustaining growth, because the roots of the problem preventing such growth are not monetary," said Stephen Cecchetti, head of the bank's monetary and economic department, presenting the report.
The bank's intervention comes at a critical time, as the Federal Reserveis preparing the US public for the end of the quantitative easingprogramme under which it bought $85bn (£55bn) of bonds every month. In total, central banks in the world's major economies, including the US, UK and Japan, now own assets worth 25% of those countries' GDP.
Stock and bond prices plunged across the world last week after Ben Bernanke, chairman of the Federal Reserve, announced that he planned to begin "tapering" quantitative easing by the end of the year.
The regulating bank in Basle believes it is the right time for central banks to reconsider their role. "We are past the height of the crisis, and the goal of policy has changed – to return still sluggish economies to strong and sustainable growth. Can central banks now really do 'whatever it takes' to achieve that goal? As each day goes by, it seems less and less likely."
Instead of more central bank stimulus, the bank would like to see governments take immediate action to repair public finances, finish the job of re-regulating the fragile banking sector and make markets work better.
It warns that record low interest rates and quantitative easing on a huge scale have dulled the imperative for politicians to act. "After all, cheap money makes it easier to borrow than to save, easier to spend than to tax, easier to remain the same than to change," the report says.
However, the bank does express concern about the knock-on effects of central banks withdrawing their emergency measures, including on emerging market economies, many of which have seen their currencies appreciate and their stock markets boom as investors have used the cheap money to invest in riskier assets.
As the stimulus is withdrawn, and bond prices start to fall, interest rates – which move in the opposite direction – could jump. "An outsize increase in interest rates could lead to volatile capital flows and exchange rates, with corresponding adverse implications for global macroeconomic and financial stability," the report warns. The International Monetary Fund also expressed fears in a recent paper that interest rates could rocket as quantitative easing comes to an end if investors "run for the door".
The bank, which hosts regular gatherings of the world's central bank governors, is well respected by economists as one of the few bodies to warn consistently about the risks building up before the credit crisis. Its tough words on the urgent need to fix public finances will strengthen the hand of the chancellor, George Osborne, as he prepares to deliver his spending review on Wednesday, setting out challenging budget cuts for many Whitehall departments for 2015-16.
It dismisses the argument that governments should soft-pedal on spending cuts until growth has recovered, saying, that "by restoring sound financial conditions, eliminating the risks associated with high debt and reducing the resources needed to service the debt, consolidation will lead to higher sustainable economic growth. As a result, its long-term benefits will more than offset its short-term costs."
In Britain, the bank's analysis suggests that unless there are curbs on "age-related spending", including pensions and healthcare, public debt could more than double, to 200% of GDP, by 2050.
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