Time for governments to fire up all engines to boost growth but central banks should preserve their ammunition: BIS

The headquarters of the Bank for International Settlements in Basel, Switzerland.
The headquarters of the Bank for International Settlements in Basel, Switzerland.PHOTO: REUTERS

ZURICH (BLOOMBERG, LONDON) - Governments must step in to boost their economies and redress policy imbalances that have forced central banks to use up most of their firepower, according to the Bank for International Settlements.

The Switzerland-based BIS, which promotes cooperation among the world's monetary officials, used its annual economic report to urge politicians to "ignite all engines" to overcome a global soft patch. They should make structural reforms and strengthen fiscal and macroprudential measures, instead of relying on ever-lower interest rates in a debt-fueled growth model that risks turbulence ahead.

US-led protectionism has dented economic confidence and slowed growth, forcing central banks to prepare to ease policy again even if they haven't yet returned to their pre-crisis settings. The Federal Reserve and the European Central Bank are expected to cut interest rates this year, while nations including Australia, Russia, India and Chile have already started.

"Hard as it is politically, it is essential to revive the flagging efforts to implement policies designed to boost growth," the BIS said. "Monetary policy can no longer be the main engine."

Presenting the annual report of the Swiss-based BIS, dubbed the central bank for the world's central banks, BIS chief Agustin Carstens told reporters any easing needed to be considered carefully and done sparingly.

"We would stress that it is important to preserve some room for manoeuvre for more serious downturns," he said.

While US-China trade tensions have weighed on economic sentiment this year many developed countries had recovered to potential or above potential growth rates, Carstens said. Inflation was mostly not that far from target ranges either.

That raised the question of how forthcoming central banks should be with any additional accommodation.

"Monetary policy should be considered more as a backstop rather than as a spearhead of a strategy to induce higher sustainable growth," Carstens said.

He also warned that sustained use rendered policies like negative rates or quantitative easing less effective. "How much more stimulus will you get if rates are reduced by another 25 basis points? That will produce a lower profile of bang for that buck," Carstens said.

The message to conserve firepower from the BIS is not surprising. Until this year it had been urging top central banks to press on with raising rates or at least move away from crisis-era stimulus programmes.

The annual report's primary call was for a better balance to be struck between monetary policy, structural reforms, government fiscal policy and macroprudential measures that encompass regulation of banks and other financial institutions.

Carstens also said the possible short-term gain of lowering borrowing costs had to be balanced against the "potential risks in terms of asset misallocation and asset mispricing and financial stability risks as we move forward".

The sharp change in direction from the Fed and others this year has seen global markets rocket since January.

Last year's big drops in European, Asian and eventually US stocks have been replaced by a near 20 per cent leap in the S&P 500 and China's biggest markets, reviving hopes the decade-long global bull-run may not have ended after all.

Global stocks have reflated by roughly US$8 trillion, emerging markets have done well even as China's economy has revealed cracks, yet yields on ultra-safe government bonds like US Treasuries and German Bunds have plunged dramatically.


Claudio Borio, the head of the BIS Monetary and Economic Department, acknowledged that markets had become dependent on accommodative monetary policy and weaning them off that dependence could cause "withdrawal symptoms".

Following fierce criticism of the Fed by US President Donald Trump, he also stressed the importance of central bank independence. "The autonomy of central banks is an important asset and it is an asset that tends to come under threat when it is most needed," he told Reuters.

"Of course these are challenging times politically for central banks but it is clearly not helpful to try to interfere with their decisions."

Another of the annual report's warnings was of a rapid build up of corporate debt via collateralised loan obligations (CLO) and other forms of credit that do not go through the normal regulated banking channels.

It had turned on "some warning lights" Carstens said, having similarities to the steep rise in collateralised debt obligations (CDO) that amplified the US subprime crisis more than a decade ago. The banking sector is now better capitalised, however, he said.