Time to seize breathing-space offered by central banks: BIS
The world's central banks have done their job in offering breathing-space during the financial crisis, but government and business has been too slow with much-needed reforms to boost productivity, the Bank for International Settlements said Sunday.
The Swiss-based BIS — dubbed the central bankers’ central bank — said in its annual report that a “forceful programme” of “repair and reform” was the only way to ensure a genuine economic revival.
“Although six years have passed since the eruption of the global financial crisis, robust, self-sustaining growth still eludes the global economy,” the BIS said in a statement.
“During this time, central banks in advanced economies have been forced to look for ways to increase their degree of accommodation. But central banks cannot solve the structural problems that are preventing a return to strong and sustainable growth,” it underlined.
After the crisis struck, central banks moved to stoke flagging economies by easing monetary policy, for example slashing interest rates and increasing their balance sheets.
“What central bank accommodation has done during the recovery is to borrow time for others to act, allowing them to repair balance sheets, to consolidate fiscal balances, and to enact reforms to restore productivity growth,” said Stephen Cecchetti, head of the BIS monetary and economic department.
“The time needs to be used wisely. But so far, continued low interest rates and unconventional monetary policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system,” he told reporters in a telephone briefing.
The BIS report showed that the balance sheets of central banks have almost tripled compared with pre-crisis levels, and are still rising.
Despite headway in some countries on cutting household debt, improving the capitalisation of financial institutions, and painful steps on reining in state deficits, overall progress has been “slow, halting and uneven”, said Cecchetti.
“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,” he underlined.
Cecchetti said central banks must now refocus on ensuring financial stability and encouraging reforms, rather than “retarding them with near-zero interest rates and purchases of ever larger quantities of government securities”.
“It is others that need to act, speeding up the hard but essential reform and repair work to unlock productivity and employment growth. Continuing to wait will not make things any easier, particularly as public support and patience erode,” he insisted.
“Our message is simple. Authorities need to hasten labour and product market reforms so that economic resources can shift more easily to high-productivity sectors. Households and firms have to complete the difficult job of repairing their balance sheets, and governments must intensify their efforts to ensure the sustainability of their finances,” he added.
The BIS report said that central banks must grapple with how best to shift from their “extraordinarily accommodative policy stance” by raising interest rates.
“They will need to strike the right balance between the risks of exiting prematurely and the risks associated with delaying exit further,” it noted.
Founded in 1930, the BIS is the world’s oldest international financial institution, and groups 60 central banks including heavyweights such as the European Central Bank, the US Federal Reserve, the People’s Bank of China and the Bank of Japan.
Besides acting as a bank for its members, it provide a forum for policy discussions and aims to foster international cooperation on monetary and financial stability.