It has become a disconcerting trend that as geopolitical events intensify and keep a majority of people engaged in the latest outbreak of political theatre, the words of central bankers fall on increasingly deaf ears.
At a seminar of the European Stability Mechanism this month, Bank for International Settlements General Manager Agustin Carstens delivered a speech called, ‘Shelter from the Storm‘.
The speech can be summarised as follows:
- The IMF may not have enough resources to manage a future financial crisis
- The post 2008 ‘recovery’ was nurtured by central banks
- Central bank intervention has coincided with the increased accumulation of debt in both major and emerging economies
- The challenge for central banks is to meet their inflation target
- Governments must quickly implement ‘growth-friendly structural reforms’ as monetary policy is ‘normalised’
The latter bullet point refers to Basel III, the regulatory reforms that were devised through the BIS in response to the financial crisis triggered in 2008. The BIS have been pushing the line in recent communications that without these reforms being fully implemented by national administrations, the financial system will remain vulnerable to a renewed downturn. Full adoption of the reforms is not due to occur until 2022.
Discussing the path to ‘normalisation‘ of monetary policy, Carstens states that central banks have ‘implemented normalisation steps very carefully‘:
- They have been very gradual and highly predictable. Central banks have placed great emphasis on telegraphing their policy steps through extensive use of forward guidance.
Because of the gradual nature of the turn around from monetary accommodation to monetary tightening, central banks have avoided excess scrutiny. When market ructions do occur, as we have witnessed throughout 2018, geopolitical disorder has been held up as the leading cause. Central banks, as Bank of England governor Mark Carney recently put it, are ‘a side show‘.
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