Central banks told to back off

Tim Wallace
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CENTRAL banks should stop printing money and stop encouraging indebted households to borrow more, key official body the Bank of International Settlements (BIS) said last night.

Instead of encouraging another debt bubble, the best way to help the economy is for governments to push through major reforms, slashing red tape and freeing workers and businesses to move from sector to sector, improving productivity, it said.

The BIS is frustrated that governments have used low rates as an excuse not to take serious action, delaying economic reforms as the very easy conditions have taken the pressure off politicians.

“Easy financial conditions can do only so much to revitalise long-term growth when balance sheets are impaired and resources are misallocated on a large scale. In many advanced economies, household debt remains very high, as does non-financial corporate debt,” said BIS head Jaime Caruana.

“It does not matter how attractive the authorities make it to lend and borrow – households and firms focused on balance sheet repair will not add to their debt, nor should they. More stimulus cannot revive productivity growth or remove the impediments that block a worker from shifting into a promising sector.”

His warning comes after markets were thrown into turmoil at the end of last week following hints from the Federal Reserve that money printing could be gradually scaled back over the next year. Investors proved their addiction to easy money as markets tumbled as a result of the planned tapering – that is, reducing the amount of mortgage assets bought by the Fed each month from its current $85bn. But the BIS annual report argued a withdrawal of stimulus is needed despite markets’ fears.

“Can central banks now really do “whatever it takes” to achieve [sustainable growth]? As each day goes by, it seems less and less likely,” said Caruana. “Central banks cannot repair the balance sheets of households and financial institutions. Central banks cannot ensure the sustainability of fiscal finances. And central banks cannot enact the structural economic and financial reforms needed to return economies to the real growth paths authorities and their publics want and expect.”