Banks cannot do ‘whatever it takes’

Central banks can’t expand loose monetary policy without exacerbating risks to world economies, the Bank for International Settlements said.

“Central banks cannot do ‘whatever it takes’ to return still-sluggish economies to strong and sustainable growth,” said Stephen Cecchetti, economic adviser and head of the monetary and economic department at the BIS in Basel, Switzerland. “Central banks cannot do more without compounding the risks they have already created.”

By putting policy rates close to zero and expanding balance sheets, central banks have given borrowers and banks time to repair their finances, though progress has been “uneven” across countries, he said.

Monetary institutions must refocus on their traditional role of encouraging adjustment, while authorities must hasten reform to shore up creditworthiness. “It is others that need to act, speeding up the hard but essential reform and repair work to unlock productivity and employment growth,” Cecchetti said.

“Each country needs to tailor the reform agenda to maximise its chances of success without endangering the ongoing economic recovery.”

Cecchetti spoke on a briefing to mark the release of the BIS’s annual report, which said that low interest rates are creating “international spillovers” that direct capital flows to fast-growing economies that pushes up currencies. Delivering more stimulus is becoming “increasingly perilous” and puts monetary policy officials in a “delicate position”, it said.

Restoring growth requires reforms to encourage capital to shift from industries that became too big during the boom to sectors that have prospects of being more productive, the report said.

The report went to press on Jun 13-14, before Federal Reserve chairman Ben Bernanke’s comments last week, that the Fed will probably taper its bond buying next year, sparked volatility in global markets.

“Disruptive market dynamics could even materialise as soon as central banks signal that an exit is imminent,” the BIS said.

“The risk that exit will be delayed to avoid such disruptions is likely to rise over time, as the situation becomes more entrenched.”