- Bali gathering underscores era of unorthodox policies
- Dudley offers defense of poverty-reducing globalization
Central bank officials from around the world converged on the Indonesian island of Bali on Monday to swap ideas on tools to address global economic and financial risks. The takeaway: it’s time to start thinking outside the box.
Meeting in a location better known for its surfing and temples than debates on financial safety nets, policy makers from Switzerland to the Philippines agreed that conventional monetary policy alone is no longer enough to manage growth. They also debated inadequacies in the current global financial safety-net system.
Outgoing Reserve Bank of India Governor Raghuram Rajan reiterated his proposal for a new permanent liquidity facility, building on the dollar swap lines that were established between the Federal Reserve and a selection of central banks after the 2008 financial meltdown, to ensure funding during emergencies.
"Longer term, we need some agreement between the fund and major central banks,” Rajan said, referring to the International Monetary Fund. The plan “would allow the fund to be a backstop to a liquidity facility from the central banks that don’t come on an individual bilateral basis but on a multilateral consensus.”
There are other, more radical suggestions too. Monetary Authority of Singapore Managing Director Ravi Menon said there’s a case to explore ideas such as "target zones" to help limit currency volatility.
“Even if you allow considerable amount of flexibility in exchange rates, are there some kind of target zones that can be set internationally, and an international coordinating mechanism to make sure that exchange rates stay within those target zones?” Menon said. Another argument for the method is that it “conditions market expectations and prevents overshooting and undershooting” of currencies, he said.
Simon Potter, an executive vice president of the Federal Reserve Bank of New York, said at the same conference that currencies have become more important recently.
“In our current environment, the role of the exchange rate in trade and current-account adjustments becomes more critical as monetary policy stances diverge across the major economic areas,” he said.
In the case of the Swiss National Bank, Chairman Thomas Jordan said it had no option but to abandon a conventional policy approach after a wave of safe-haven buying among investors sent the Swiss franc soaring against the euro. The bank responded through intervention and negative rates, and has no plans to drop those policies in a hurry.
"We are convinced that given the difficult situation with the overvalued currency, the overvalued Swiss franc, the negative output gap and negative inflation, the current approach is the right one," said Jordan, referring to "the expansion of monetary policy with negative rates and the willingness to intervene."
The gathering of central bankers came amid continuing uncertainty for the global economy as growth slows and market sentiment remains fragile.
Current and former central bankers used the conference to list how the economic landscape is increasingly becoming more complex and influenced by factors outside their immediate influence: terrorism, migration, disease, geopolitical risks and domestic political shocks were among the issues added to the worry list.
The need for more structural reforms was also aired at the conference, backing calls for governments to tackle their economies’ underlying problems and take pressure off central banks. Until then, the world will need to adjust to a slower pace of growth than experienced before the 2008 crisis, said India’s Rajan.
"Clearly many central bankers are convinced there are a limited number of rabbits that can be pulled out of the hat at this point in time," said the former IMF chief economist, who is set to leave his post next month.
Another issue that drew concern among the attendant policy makers was the growing backlash against globalization. Federal Reserve Bank of New York President William Dudley was among those offering a defense.
"When I think about globalization I think about the hundreds and hundreds of millions of people who have been lifted out of poverty over the last several decades," Dudley said. "I just can’t see how someone can legitimately say that globalization has been a bad thing."