Global Monetary Authorities Should Taper Sooner Than Later

This is a summary of remarks made by Claudio Borio, head of the monetary and economic department at the Bank for International Settlements

Some seven years after the financial crisis broke out, the global economy is still under its shadow. Growth has picked up, but a sustainable and balanced expansion may yet prove elusive.

Contrasts abound. Financial markets are euphoric, in the grips of an aggressive search for yield and beguiled by exceptionally low volatility, and yet investment in the real economy remains weak while the macroeconomic and geopolitical outlook is still highly uncertain.

In a number of crisis-hit economies, balance sheet repair is incomplete, and yet there is already froth in property and corporate bond markets. In several countries spared by the crisis there are all-too-familiar signs of growing financial vulnerabilities.

More generally, private and public-sector debt continues to grow even as the capacity to pay for it is diminishing. And the policy room for manoeuvre has been shrinking.

Monetary policy is testing its outer limits and struggling to normalize. Fiscal sustainability is under strain.

This year’s Bank of International Settlements annual report argues that understanding the challenges the global economy is facing requires a long-term perspective. It was an outsized financial boom, best captured by unusually strong increases in credit and property prices, that caused the financial crisis and the subsequent balance sheet recession. And it was the policy response to the bust that still shapes the course ahead.

Focusing our attention on the shorter-term output fluctuations is akin to staring at the ripples on the ocean and losing sight of the more threatening underlying waves.

Returning the global economy to sustainable and balanced growth calls for adjustments to the current policy mix and to policy frameworks. A new compass is badly needed. The current upturn in the global economy is a precious window of opportunity that should not be wasted.

In countries that were hit by a balance sheet recession, there is a need to put more emphasis on balance sheet repair and structural reforms and relatively less on monetary and fiscal stimulus.

Elsewhere, in countries where financial booms have been under way, and some are in their late stages, there is a need to avoid being lulled into a false sense of security, to strengthen the resilience of the financial system and to seek to constrain the build-up of financial imbalances.

Everywhere, there is a need to redouble efforts to strengthen long-term potential growth, providing reassurance that growth will be there to justify current investments. And it is essential to move away from debt as the main engine of growth.

Adjusting policy frameworks requires policies that seek to tame the financial cycle. This means, in particular, policies that lean more deliberately and persistently against financial booms and that ease less aggressively and persistently during busts. A key aspect here is to recognize the powerful impact that monetary policy can have on risk-taking, both within and across national borders.

The stakes are high. The road ahead is long. All the more reason, then, to start the journey sooner rather than later.

(The article has been edited for clarity)