Central banks told to head for exit and stop trying to spur a global economic recovery
“Can central banks now really do ‘whatever it takes’?” the BIS asked. “It seems less and less likely. Central banks cannot repair the balance sheets of households and financial institutions.”
Central banks told to head for exit
By Claire Jones, Economics Reporter
Central banks must head for the exit and stop trying to spur a global economic recovery, the Bank for International Settlements has said following a week of market turbulence sparked by the US Federal Reserve’s signal that it would soon cut the pace of its bond buying.
US Treasury markets, which saw yields hit their highest level in almost two years on Friday, face further challenges this week as they prepare to sell an extra $99bn of debt. After last week’s global sell-off, markets in the US will also be knocked by traders winding down for the end of the second quarter.
“One cannot reverse the Fed’s big bang moment,” said George Goncalves, strategist at Nomura Securities, adding that the scale of foreign demand for this week’s Treasury debt sales would be a crucial test of sentiment.
The BIS, which counts the world’s leading monetary authorities as members, said cheap and plentiful central bank money had merely bought time, warning that more bond buying would retard the global economy’s return to health. It used its influential annual report to call on members to re-emphasise their focus on inflation and press governments to do more to spearhead a return to growth.
The BIS report comes on the back of last week’s markets turmoil, fuelled by Fed chairman Ben Bernanke’s comments that the central bank could slow its $85bn monthly bond-buying programme this year and end it by mid-2014.
Often referred to as the central bankers’ bank, BIS said the global economy was “past the height of the crisis” and its goal was “to return still-sluggish economies to strong and sustainable growth”.
“Alas, central banks cannot do more without compounding the risks they have already created,” the BIS said, adding that delivering more “extraordinary” stimulus was “becoming increasingly perilous”.
“How can central banks encourage those responsible for structural adjustment to implement those reforms? How can they avoid making the economy too dependent on monetary stimulus? When is the right time for them to pull back ... [and] how can they avoid sparking a sharp rise in bond yields? It is time for monetary policy to begin answering these questions,” the report said.
Mario Draghi’s rallying cry, uttered last summer at the height of the eurozone turmoil, that the European Central Bank would do “whatever it takes” to preserve the currency bloc was now being misconstrued, it warned.
“Can central banks now really do ‘whatever it takes’?” the BIS asked. “It seems less and less likely. Central banks cannot repair the balance sheets of households and financial institutions.”
The BIS also railed against critics of eurozone austerity, saying there were “reasons to be sceptical” about arguments such as that of the International Monetary Fundthat higher fiscal multipliers meant governments’ assumptions about the trade-off between consolidation and growth had been too favourable. There was “no compelling evidence that [multipliers] are large enough to render fiscal consolidation more difficult [or actually self defeating].”
Stephen Cecchetti, head of the BIS’s monetary and economic department, said at the end of last month that the initial rise in yields for US Treasuries and stock market reaction following Mr Bernanke’s hints in May that the Fed would slow its asset purchases “should come as no surprise”.
Separately, the BIS said Jaime Caruana, its general manager, would remain in office until March 2017.
Mr Caruana said at the BIS annual meeting on Sunday: “Ours is a call for acting responsibly now to strengthen growth and avoid even costlier adjustment down the road ... Monetary policy has done its part. Recovery now calls for a different policy mix – with more emphasis on strengthening economic flexibility and dynamism and stabilising public finances.”
Additional reporting by Michael Mackenzie in New York
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