In its recent annual report, the Bank for International Settlements (BIS) slammed the world’s major (and minor) central banks for their profligate monetary policies since the days of the financial crisis. While the BIS doesn’t go so far as to say intervention wasn’t needed, it leaves readers of the annual report with the distinct impression that QE has gone on long enough. Here are some excerpts from the annual report that we found interesting. (Our emphasis added in bold).
Two major interrelated trends have characterised the conduct of monetary policy over the past five years. First, policy rates in all economic areas have been cut and kept low (Graph VI.1). Most major advanced economy central banks had by early 2009 reduced interest rates all the way to their effective lower bound, where they still are four years later. The Federal Reserve underpinned its low interest rate policy by adopting forward guidance linking the duration of its policy stance to unemployment and inflation objectives. The ECB has kept rates low since early 2009. After raising rates twice in 2011, it subsequently reduced rates, most recently to new lows. In real terms, policy rates in the major advanced economies have not been so persistently negative since the 1970s.
The second key monetary policy trend is the massive growth of central bank balance sheets, both in absolute terms and as a percentage of GDP (Graph VI.2). Since late 2007, central bank total assets worldwide have roughly doubled to about $20 trillion, or just over 30% of global GDP.
The Bank of Japan has launched its Quantitative and Qualitative Monetary Easing programme aiming to double the size of its monetary base and the outstanding amounts of Japanese government bonds and exchange-traded funds and more than double the average maturity of its government bond purchases.
Despite having succeeded in containing the crisis, monetary policy has fallen short of original expectations for various reasons. In this regard, it may have been inappropriate to regard the previous trajectory of GDP as a benchmark. At least in the countries at the centre of the financial bust, the sustainable path of GDP has arguably been overestimated. Financial booms tend to conceal structural misallocations of resources; these imbalances are only fully revealed in the subsequent busts and the balance sheet recessions that accompany them (see Chapter III).
At the same time as central bank measures may have become less effective, accommodative monetary policies have produced various side effects, as highlighted in last year’s Report. Prolonged low policy rates tend to encourage aggressive risk-taking, the build-up of financial imbalances and distortions in financial market pricing. This environment has also created incentives to delay necessary balance sheet repair and reforms.
