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BIS tells central banks to stop pumping, start watching inflation

Section: Daily Dispatches

Central Banks Told to Head for Exit

By Claire Jones
Financial Times, London
Sunday, June 23, 2013

Central banks must head for the exit and stop trying to spur a global economic recovery, the organisation representing the world's monetary authorities has warned following a week of market turbulence sparked by the US Federal Reserve's signal that it would soon cut the pace of its bond buying.

The Basel-based Bank for International Settlements used its influential annual report to call on members to re-emphasise their focus on inflation and press governments to do more to spearhead a return to growth.

The report, presented to many of the world's top central bankers in Basel for the BIS's annual meeting at the weekend, follows last week's selloff in equities, bonds, and commodities, fuelled by fears the Fed's tapering would spark a fresh wave of turmoil in global financial markets. Ben Bernanke, the Fed chairman, said last Wednesday that the central bank could slow its $85 billion monthly bond-buying programme this year and end it by mid-2014.

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The BIS, often referred to as the central bankers' bank, said the global economy was "past the height of the crisis" and that the goal of policy was "to return still-sluggish economies to strong and sustainable growth."

It said cheap and plentiful central bank money had merely bought time, warning that more bond buying would retard the global economy's return to health by delaying adjustments to governments' and households’ balance sheets.

"Alas, central banks cannot do more without compounding the risks they have already created," the BIS said, adding that delivering more "extraordinary" stimulus was "becoming increasingly perilous."

"How can central banks encourage those responsible for structural adjustment to implement those reforms? How can they avoid making the economy too dependent on monetary stimulus? When is the right time for them to pull back  . . . [and] how can they avoid sparking a sharp rise in bond yields? It is time for monetary policy to begin answering these questions?," the report said.

Mario Draghi's rallying cry, uttered last summer at the height of the eurozone turmoil, that the European Central Bank would do "whatever it takes" to preserve the currency bloc was now being misconstrued, it warned.

"Can central banks now really do 'whatever it takes'?" the BIS asked. "As each day goes by, it seems less and less likely. Central banks cannot repair the balance sheets of households and financial institutions. Central banks cannot ensure the sustainability of fiscal finances. And, most of all, central banks cannot enact the structural economic and financial reforms needed to return economies to the real growth paths."

Stephen Cecchetti, head of the BIS's monetary and economic department, recently said that the initial rise in yields for US Treasuries following Mr Bernanke's hints in May that the Fed would slow the pace of its asset purchases "should come as no surprise."

Though he warned market volatility did "create risks," Mr Cecchetti flagged that the reaction of stock markets to the hints had been far from disastrous. "A few months ago this would probably have set equity markets into free-fall, but this time stock prices seemed largely unaffected, suggesting that market participants are quite optimistic about the outlook for the US economy."

Separately, the BIS said Jaime Caruana, its general manager, would remain in office until March 2017. His current five-year term was due to end in March 2017.

Mr Caruana said at the AGM on Sunday: "Ours is a call for acting responsibly now to strengthen growth and avoid even costlier adjustment down the road . . . .  Monetary policy has done its part. Recovery now calls for a different policy mix -- with more emphasis on strengthening economic flexibility and dynamism and stabilising public finances."

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