Central bank cavalry can no longer save the world

Sat Oct 10, 2015 3:18pm EDT
 
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By David Chance

LIMA (Reuters) - In 2008 central banks, led by the Federal Reserve, rode to the rescue of the global financial system. Seven years on and trillions of dollars later they no longer have the answers and may even represent a major risk for the global economy.

A report by the Group of Thirty, an international body led by former European Central Bank chief Jean-Claude Trichet, warned on Saturday that zero rates and money printing were not sufficient to revive economic growth and risked becoming semi-permanent measures.

"Central banks have described their actions as 'buying time' for governments to finally resolve the crisis... But time is wearing on, and (bond) purchases have had their price," the report said.

In the United States, the Federal Reserve ended its bond purchase program in 2014, and had been expected to raise interest rates from zero as early as June 2015.

But it may struggle to implement its first hike in almost 10 years by the end of the year. Market pricing in interest rate futures puts a hike in March 2016.

The Bank of England has also delayed, while the European Central Bank looks set to implement another round of quantitative easing, as does the Bank of Japan which has been stuck in some form of quantitative easing since 2001.

Reuters calculates that central banks in those four countries alone have spent around $7 trillion in bond purchases.

The flow of easy money has inflated asset prices like stocks and housing in many countries even as they failed to stimulate economic growth. With growth estimates trending lower and easy money increasing company leverage, the specter of a debt trap is now haunting advanced economies, the Group of Thirty said.   Continued...

 
Former European Central Bank (ECB) President Jean-Claude Trichet attends a conference of central bankers hosted by the Bank of France in Paris November 7, 2014.   REUTERS/Charles Platiau