Central banks near policy limits but back in focus after G20

Sun Feb 28, 2016 9:33am EST
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By Balazs Koranyi and Leika Kihara

FRANKFURT/TOKYO (Reuters) - The widely predicted failure of G20 leaders to agree on bold new steps to reinvigorate the world economy at a meeting in Shanghai this weekend puts the onus firmly back on central bankers.

But after years of increasingly desperate attempts to kick-start growth there is fear among bankers and top finance officials that monetary policy is running out of effective ammunition and future stimulus efforts could even be harmful.

"Monetary policy is extremely accommodative to the point that it may even be counterproductive in terms of negative side effects on banks, policies and growth," German Finance Minister Wolfgang Schaeuble said at the G20 meeting.

"Fiscal as well as monetary policies have reached their limits," he said. "If you want the real economy to grow, there are no shortcuts which avoid reforms."

The G20 acknowledged that monetary policy alone is not enough to combat rising global risks but leaders failed to outline concrete steps, making only vague and general pledges.

Facing a new paradigm of slow growth and the legacy of crises, top central banks have kept rates near or below zero for years, waiting in vain for governments to embrace reforms instead of pointing the finger at monetary policy.

Testing uncharted waters, smaller central banks in Switzerland, Sweden and Denmark even cut rates deep into negative territory, raising the prospect that monetary policy still had some room left.

The BOJ and the ECB both followed suit but the results have been mixed, with side effects.   Continued...

China's Finance Minister Lou Jiwei (L) and China's central bank governor Zhou Xiaochuan attend a group photo session during the G20 finance ministers and central bank governors meeting in Shanghai, China February 27, 2016. REUTERS/Aly Song