Central banks face growth challenge

Washington/Frankfurt, Oct 1

Central bankers who led the charge to pull global economy from a cliff during financial crisis now risk becoming bit players, ill-equipped to snap the world out of sluggish growth and its addiction to cheap credit.

Despite near-zero rates and $7 trillion of monetary stimulus unleashed by central banks in major industrial economies, investment and growth is stuck below pre-crisis levels and tepid demand is hurting developing economies by depressing prices of their commodity exports.

“Memo to the human race: you tried all this monetary policy stuff and at the end of the day it did not succeed in getting you back where you need to be,” Paul Sheard, chief global economist for Standard & Poor’s, told Reuters.

Sheard suggested it might be time for central banks to admit their interest rates are stuck at zero, and for other policymakers to step up.

Essentially central bankers face a dilemma — either lean more on politicians to do more to boost growth or embark on a new round of experimentation.

Both come with risks and uncertain payoffs.

Calls by the International Monetary Fund (IMF) and others for increased spending on infrastructure, reforms that could open markets in Japan and Europe, or outright fiscal stimulus in countries like Germany, have produced little action since the 2008-09 financial crisis.

By piling more pressure on governments, central banks risk not accomplishing much and yet provoking a political backlash that could threaten their independence.

More experimentation — such as negative interest rates or direct financing of government spending — could deepen concerns that central banks were straying further from their core competences.

Then there is the third, increasingly unappealing option: do more of the same. The Bank of Japan (BoJ) and the European Central Bank (ECB) continue buying securities to spur more lending, while the Federal Reserve and the Bank of England (BoE) do have an option of resuming debt purchases they wrapped up in 2014 and 2012.

Yet, as IMF noted, Japan and Europe are unlikely to grow any faster without serious structural change. In fact, Japan probably slipped back into recession last quarter despite $1.50 trillion injected by the BoJ into the economy since April 2013.

In the United States, the Fed’s quantitative easing — creating money to buy securities and dramatically boost the reserves that banks could lend on elsewhere — gets credit for stabilising financial conditions. But policymakers are not sure how much growth it produced and what more could it accomplish.

“We put everything we could to work and (US growth) is still just slightly better than two per cent That is some sign the tools did not have the potency we expect,” Atlanta Fed President Dennis Lockhart told reporters following US central bank’s September 16 to 17 policy meeting.

While US unemployment rate halved to just over five per cent from its recession peak in 2009, various studies estimate that quantitative easing could take credit for only between a quarter of a percentage point and 1.5 points of that decline.

The dramatic run-up in central banks’ balance sheets also failed to bring inflation back to levels considered healthy, with the Fed far from its target and Japan and eurozone in or close to outright deflation.

In theory, ample and cheap money should encourage borrowing, spending and growth, but with households, businesses and governments scaling back debt after the crisis, major economies did not follow the script.

With a sense that there is little bang for the buck left in quantitative easing, the narrative is shifting from central bankers as superheroes to one of central bankers as bystanders, or, at best, in supporting roles.