In its annual report, the Swiss-based Bank for International Settlements (BIS) warned that artificially low rates and inflated asset prices could also be holding back growth by masking lenders’ bad debts and deterring them from cleaning up their balance sheets.
“Prolonged and aggressive monetary accommodation may delay the return to a self-sustaining recovery,” BIS said. “It can undermine the perceived need to deal with banks’ impaired assets.”
The BIS report may be found here. This chart from page 37 shows just how extraordinary has been the central banks’ actions in the USA and UK:A chapter considering “The limits of monetary policy” concludes,
The global monetary policy stance is unusually accommodative. Policy rates are well below traditional benchmark measures. At the same time, central bank balance sheets have reached an unprecedented size and continue to expand.
Against the background of weak growth and high unemployment in many advanced economies, sustained monetary easing is natural and compelling. However, there is a growing risk of overburdening monetary policy. By itself, easy monetary policy cannot solve underlying solvency or deeper structural problems. It can buy time, but may actually make it easier to waste that time, thus possibly delaying the return to a self-sustaining recovery. Central banks need to recognise and communicate the limits of monetary policy, making clear that it cannot substitute for those policy measures that can address the root causes of financial fragility and economic weakness.
The combination of weak growth and exceptionally low interest rates in the core advanced economies, and efforts to manage the spillovers in emerging market economies, has helped to spread monetary accommodation globally. The resulting risks of a build-up of financial imbalances and increasing inflationary pressures in emerging market economies might have significant negative repercussions on the global economy. This points to the need for central banks to take better account of the global spillovers from their domestic monetary policies to ensure lasting financial and price stability.
Finally, central banks need to beware of longer-term risks to their credibility and operational independence. Failing to appreciate the limits of monetary policy raises the risk of a widening gap between what central banks are expected to deliver and what they can actually deliver. This would complicate the eventual exit from monetary accommodation and may ultimately threaten central banks’ credibility and operational autonomy. This concern is reinforced by political economy risks arising from the combination of balance sheet policies that have blurred the line between monetary and fiscal policies, on the one hand, and the risk of unsustainable fiscal positions, on the other.
So, monetary activism is attractive but it cannot solve our root problems, only buy time. It has created financial and inflationary risks for the whole world. It risks the credibility of central banks and they could end up under political control.
Thank goodness for the Swiss. Perhaps it will not be long before there is an admission that monetary policy dropped us into this mess.