segunda-feira, 31 de agosto de 2015
Central bank monetary arsenal is increasingly ineffective
“Don’t fight the Fed” is a key commandment for every trader on Wall Street. Underlying it is the assumption that central bankers rule financial markets and can move prices, wiping out anything in their way. The recent Chinese stock market rout and the global sell-off that followed have called this dogma into question.
In an attempt to boost confidence and prop up share prices, Chinese authorities cut interest rates and bank reserve requirements, eased regulation on broker accounts and bought stocks. But despite the extraordinary effort, they lost control. Markets have now stabilised, yet one question remains: are central bankers running out of ammunition and credibility?
Several signs suggest loose monetary policy is increasingly proving ineffective, and central banks are failing to generate enough cyclical upswing to win against the structural forces constraining growth and inflation. Monetary stimulus alone cannot fix debt overhangs, low productivity, persistent unemployment, stagnant demographics and a lack of reforms and fiscal stimulus.
In the US and UK, where quantitative easing is deemed most successful and interest rates are expected to be lifted sooner than anywhere else, wage growth remains weak despite rising GDP growth and falling unemployment. Companies and households, which reduced excess debt during the crisis, are starting to borrow again. Nearly a quarter of mortgage borrowers in Britain are taking on loans of four times their gross income, despite the red flags raised by the Bank of England. In both countries the recovery appears deeply uneven, as financial centres like London or New York pull further ahead of other areas.
The eurozone faces more complex challenges. The rebound generated by the European Central Bank’s QE programme in the first quarter is losing momentum and inflation expectations are almost back to where they were before QE was announced.
The transmission of credit to small and medium-sized firms remains impaired. Banks are still deleveraging, and with €1tn of non-performing loans on their balance sheets, or more than 10 per cent of GDP, they are hardly able to lend.
The good news is that policymakers are moving in the right direction by cleaning up banks, harmonising regulation and deepening capital markets. But this will take years. Meanwhile, fiscal stimulus remains insufficient and the Juncker plan for investment is still in its infancy.
China’s situation is perhaps the most alarming. Chinese authorities have implemented the most aggressive multi-pronged stimulus plan globally. Yet, reform efforts aimed at transforming China’s growth model to a more balanced mix of consumption and production remain unclear.
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On the one hand, the government has tightened regulation on shadow banks and local governments, both key drivers of excess investment in real estate. On the other hand, easy policy is fuelling even larger debt overhangs: corporate, household and local government debt has doubled since 2007 to more than 200 per cent of GDP.
Banks that were cleaned up and recapitalised are now seeing bad debts rising again, as property prices keep falling in peripheral cities. While authorities still have dry powder available to soften the landing, a failure to reduce excess industrial capacity and address debt overhangs may result in deflationary pressures and larger economic losses down the road.
What should central bankers do? Many are calling for the Federal Reserve to delay its planned 2015 interest rate lift-off. The reality is that, like other central banks, the Fed does not have much choice. Raising rates this year may safeguard its credibility, but inflation is falling and the chances of a policy mistake are rising. This makes any path to normalisation limited and shortlived.
Monetary stimulus kick-started a recovery in the US and the UK and bought the eurozone time to implement reforms. But it is not sufficient for a durable recovery. The solution is a co-ordinated government effort to address the structural constraints to growth and inflation. Without this, policymakers will keep using the same ineffective monetary anaesthetic against future crises.
A prolonged loop of loose policy carries dangerous side-effects for the economy and for society: potential asset bubbles, over-allocation of resources to leverage-heavy industries and rising inequality. Central bankers increasingly appear to be parading in the emperor’s new clothes.
Alberto Gallo is head of macro credit research at RBS