Follow Us

Follow us on Twitter  Follow us on LinkedIn

31 August 2015

Financial Times: Central bank monetary arsenal is increasingly ineffective

Several signs suggest loose monetary policy is increasingly proving ineffective, and central banks are failing to generate enough cyclical upswing to win against the structural forces constraining growth and inflation.

The eurozone faces more complex challenges. The rebound generated by the European Central Bank’s QE programme in the first quarter is losing momentum and inflation expectations are almost back to where they were before QE was announced.

The transmission of credit to small and medium-sized firms remains impaired. Banks are still deleveraging, and with €1tn of non-performing loans on their balance sheets, or more than 10 per cent of GDP, they are hardly able to lend.

The good news is that policymakers are moving in the right direction by cleaning up banks, harmonising regulation and deepening capital markets. But this will take years. Meanwhile, fiscal stimulus remains insufficient and the Juncker plan for investment is still in its infancy.

China’s situation is perhaps the most alarming. Chinese authorities have implemented the most aggressive multi-pronged stimulus plan globally. Yet, reform efforts aimed at transforming China’s growth model to a more balanced mix of consumption and production remain unclear.


What should central bankers do? Many are calling for the Federal Reserve to delay its planned 2015 interest rate lift-off. The reality is that, like other central banks, the Fed does not have much choice. Raising rates this year may safeguard its credibility, but inflation is falling and the chances of a policy mistake are rising. This makes any path to normalisation limited and shortlived.

Monetary stimulus kick-started a recovery in the US and the UK and bought the eurozone time to implement reforms. But it is not sufficient for a durable recovery. The solution is a co-ordinated government effort to address the structural constraints to growth and inflation. Without this, policymakers will keep using the same ineffective monetary anaesthetic against future crises.

Full article on Financial Times (subcription required)

© Financial Times

< Next Previous >
 Hover over the blue highlighted text to view the acronym meaning
Hover over these icons for more information

Add new comment