Global regulators and central bankers may need to consider “innovative and unconventional combinations” of policies to prevent deflation, Financial Services Authority Chairman Adair Turner said in a speech in South Africa.
Turner said “the deflationary impact on economic growth could extend for many years ahead” if the policy response to the 2008 financial crisis wasn’t carefully designed.
The Bank of England’s policy of quantitative easing “may be subject to declining marginal impact,” Turner said, causing “a liquidity trap in which replacing private sector holdings of bonds with private sector holdings of money has little impact on behavior and thus on demand.”
Turner has overseen a loosening in FSA requirements for banks’ to hold capital and liquidity buffers since June. The FSA relaxed the amount of funds U.K. banks must hold against domestic lending last month. The regulator has also said it would include BOE liquidity measures in calculating banks’ liquid asset buffers, giving lenders room to dip into reserves.