Preserve your ammunition, BIS urges top central banks

LONDON (Reuters) – Bank for International Settlements (BIS) chief Agustin Carstens has urged top central banks to preserve their ammunition for more serious economic downturns rather than deplete it chasing higher growth.

Presenting the annual report of the Swiss-based BIS, dubbed the central bank for the world’s central banks, Carstens told reporters any easing needed to be considered carefully and done sparingly.

“We would stress that it is important to preserve some room for maneuver for more serious downturns,” he said.

That message comes just weeks before the U.S. Federal Reserve is expected to confirm a U-turn in global monetary policy and cut interest rates for first time since the financial crisis a decade ago.

Japan and China have both signaled their readiness to ease further and the European Central Bank, which only halted bond buying in December, indicated this month that it could cut its rates even deeper into negative territory.

While U.S.-China trade tensions have weighed on economic sentiment this year many developed countries had recovered to potential or above potential growth rates, Carstens said. Inflation was mostly not that far from target ranges either.

That raised the question of how forthcoming central banks should be with any additional accommodation.

“Monetary policy should be considered more as a backstop rather than as a spearhead of a strategy to induce higher sustainable growth,” Carstens said.

He also warned that sustained use rendered policies like negative rates or quantitative easing less effective. “How much more stimulus will you get if rates are reduced by another 25 basis points? That will produce a lower profile of bang for that buck,” Carstens said.

The message to conserve firepower from the BIS is not surprising. Until this year it had been urging top central banks to press on with raising rates or at least move away from crisis-era stimulus programs.

The annual report’s primary call was for a better balance to be struck between monetary policy, structural reforms, government fiscal policy and macroprudential measures that encompass regulation of banks and other financial institutions.

Carstens also said the possible short-term gain of lowering borrowing costs had to be balanced against the “potential risks in terms of asset misallocation and asset mispricing and financial stability risks as we move forward”.

The sharp change in direction from the Fed and others this year has seen global markets rocket since January.

Last year’s big drops in European, Asian and eventually U.S. stocks have been replaced by a near 20 percent leap in the S&P 500 and China’s biggest markets, reviving hopes the decade-long global bull-run may not have ended after all.

Global stocks have reflated by roughly $8 trillion, emerging markets have done well even as China’s economy has revealed cracks, yet yields on ultra-safe government bonds like U.S. Treasuries and German Bunds have plunged dramatically.

DEPENDENCY AND INDEPENDENCY

Claudio Borio, the head of the BIS Monetary and Economic Department, acknowledged that markets had become dependent on accommodative monetary policy and weaning them off that dependence could cause “withdrawal symptoms”.

Following fierce criticism of the Federal Reserve by U.S. President Donald Trump, he also stressed the importance of central bank independence.

“The autonomy of central banks is an important asset and it is an asset that tends to come under threat when it is most needed,” he told Reuters.

“Of course these are challenging times politically for central banks but it is clearly not helpful to try to interfere with their decisions.”

Another of the annual report’s warnings was of a rapid build up of corporate debt via collateralized loan obligations (CLO) and other forms of credit that do not go through the normal regulated banking channels.

It had turned on “some warning lights” Carstens said, having similarities to the steep rise in collateralized debt obligations (CDO) that amplified the U.S. subprime crisis more than a decade ago. The banking sector is now better capitalized, however, he said.

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