BIS’s Leaning Against the Wind View Critiqued by One of Its OwnBy
Turner was deputy head of BIS monetary and economic department
BIS has urged early policy tightening to avoid bubbles
A former Bank for International Settlements economist is taking aim the institution’s famously heterodox view and argues that policy makers should be wary of tightening monetary policy too quickly.
The central bank for central banks has been advocating higher interest rates to combat the buildup of asset price bubbles for years, with Claudio Borio, who currently heads the Basel-based BIS’s monetary and economic department, a notable proponent of the view. Dubbed “leaning against the wind,” it seemed prescient during the financial crisis.
Yet Philip Turner, who retired as deputy head of that department last year and now lectures at the University of Basel, disagrees. He says raising borrowing costs more than justified by variables such as inflation and unemployment wouldn’t have prevented the global financial crisis. It won’t help financial stability down the road either.
Because regulatory requirements and easy monetary policy have encouraged investors to hold more longer-dated bonds, “the financial industry has therefore become much more exposed to interest rate shocks than it was before the crisis,” Turner finds in the paper for the London School of Economics’s Financial Markets Group. “Future monetary policy choices and trade-offs may therefore be quite different in this new world of negative or zero term premia and large interest rate exposures.”
He argues that raising rates in the face of feeble inflation simply to prevent the buildup of asset-price bubbles is in itself a financial stability risk, as higher borrowing costs weigh on aggregate demand. The current regulatory framework also doesn’t take interest rate risk adequately into account.
Moreover, by affecting demand and supply of credit, macroprudential tools can have economic consequences, he says, citing the case of New Zealand where mortgage-lending restrictions reduced inflation similarly to an interest rate rise.
The BIS has warned central banks of the risks of postponing the normalization of their ultra-loose monetary for too long to avoid a repeat of the mistakes leading up to the financial crisis. Such a point of view simply “is not convincing,” Turner said.
A spokeswoman for the BIS declined to comment.