From heroes to bystanders? Central banks' growth challenge

Thu Oct 1, 2015 1:24am EDT
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By Howard Schneider and Balazs Koranyi

WASHINGTON/FRANKFURT (Reuters) - Central bankers who led the charge to pull the global economy from a cliff during the financial crisis now risk becoming bit players, ill-equipped to snap the world out of sluggish growth and its addiction to cheap credit.

Despite near-zero rates and $7 trillion of monetary stimulus unleashed by central banks in major industrial economies, investment and growth is stuck below pre-crisis levels and tepid demand is hurting developing economies by depressing prices of their commodity exports.

“Memo to the human race: you tried all this monetary policy stuff… and at the end of the day it did not succeed in getting you back where you need to be,” Paul Sheard, chief global economist for Standard & Poor’s, told Reuters. Sheard suggested it might be time for central banks to admit their interest rates are stuck at zero, and for other policymakers to step up.

Essentially central bankers face a dilemma - either lean more on politicians to do more to boost growth or embark on a new round of experimentation.

Both come with risks and uncertain payoffs.

Calls by the International Monetary Fund and others for increased spending on infrastructure, reforms that could open markets in Japan and Europe, or outright fiscal stimulus in countries like Germany, have produced little action since the 2008-2009 financial crisis. By piling more pressure on governments, central banks risk not accomplishing much and yet provoking a political backlash that could threaten their independence.

More experimentation - such as negative interest rates or direct financing of government spending - could deepen concerns that central banks were straying further from their core competences.

Then there is the third, increasingly unappealing option: do more of the same. The Bank of Japan and the European Central Bank continue buying securities to spur more lending, while the Federal Reserve and the Bank of England do have an option of resuming debt purchases they wrapped up in 2014 and 2012.   Continued...

A woman walks past the Federal Reserve headquarters in Washington September 16, 2015.  REUTERS/Kevin Lamarque