The world needs a “triple rebalancing” in economic policies to foster growth without relying on loose monetary stimulus, the Bank for International Settlements said.
Central banks have assumed the burden of revitalizing economies for far too long, becoming a substitute for needed structural reforms, the Basel-based institution said Sunday in its annual report. It called for policy approaches that are less focused on the short term, with a greater emphasis on financial stability and more international cooperation.
“One essential element of this rebalancing will be to rely less on demand-management policies and more on structural ones,” the BIS said. “The aim is to replace the debt-fueled growth model that has acted as a political and social substitute, for productivity-enhancing reforms.”
The analysis describes dangers from emergency stimulus that remains in place throughout advanced economies almost eight years after the start of the financial crisis. Its criticism of an emphasis on “short-term macroeconomic fine-tuning” coincides with the Federal Reserve’s quandary on whether to raise interest rates this year or delay until 2016, as suggested by the International Monetary Fund.
The BIS said global growth has picked up “somewhat” over the past year, but attributed the acceleration to one-time effects such as the drop in oil prices rather than improving fundamentals. Debt is still too high, productivity growth is low relative to output and financial risks remain a concern, pointing to an unbalanced recovery.
“The global economy is still struggling to shake off completely the post-crisis malaise,” said Claudio Borio, head of the BIS monetary and economic department, while discussing the content of the report in a conference call. Borio cited ultra-low interest rates as the “most visible symptom” of the weak recovery and a “vivid reminder” of just how overburdened monetary policy has become in a bid to fuel growth.
The report said the plunge in rates underpins the contrast between high risk-taking in financial markets and the real economy, where investment is still badly needed. In the long term, low rates risk weakening economic activity and the financial sector by hindering rational investment decisions and delaying necessary adjustments.
“We should not accept the unusually low interest rates as the new normal,” BIS General Manager Jaime Caruana said. “If we do, we run the risk of validating the perception that they are the only way to deal with the current challenges.”
The BIS also signaled that increased interaction of monetary regimes in a globalized economy has spread risks, exacerbating vulnerabilities and potential spillovers. Monetary policy divergence across key currencies and renewed dollar strength could expose vulnerabilities and lead to volatility.
As part of its recommendations, the institution called for a shift in focus form shorter term reaction policies toward a more systematic response to slower-moving cycles that takes into account global monetary and financial stability. It also urged policy makers to fully capitalize on lower oil prices to boost growth, describing as a “opportunity not to be missed.”
The BIS, which comprises 60 central banks as members, defines itself as a bank for central banks and the world’s oldest international financial organization. It aims at promoting monetary and financial stability and acts as a forum for cooperation among central banks and the financial community.