Global recovery remains fragile, says bank chief

THE global recovery is fragile and policymakers in advanced economies might still have to provide further economic support, Bank of England Deputy Governor Charles Bean has said.

In a paper presented at the annual central banking conference organised by the United States Federal Reserve, which this year is focussed on monetary policy lessons from the recent crisis, Mr Bean said policymakers had succeeded in preventing a financial market collapse.

“Even so, the deleveraging process is incomplete, the recovery remains fragile and a considerable margin of spare capacity is yet to be worked off, while further policy action may yet be necessary to keep the recovery on track,” he said.

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His comments came as pessimism about the global outlook increases and talk of further stimulus measures creeps back on to the agenda at the BoE and other central banks.

Most analysts, however, expect the BoE will keep policy on hold well into next year.

At The Fed’s August meeting it said it would resume buying long-term Treasury securities to support the flagging recovery. Former Fed Vice Chairman Alan Blinder, commenting on Mr Bean’s paper at the conference, said he believed the US central bank would take further action to ease financial conditions in coming months.

The rest of Mr Bean’s speech was devoted to examining whether there were fundamental flaws in the existing policy frameworks.

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He gave evidence to support the idea that periods of economic stability might encourage exuberance in credit markets. But he argued it would be a mistake for policy-makers to try to induce fluctuations in the economy to prevent financial market participants becoming too confident about the outlook.

He also said monetary policy was probably too weak an instrument to moderate credit or asset booms without hurting activity too much.

“Instead, with an additional objective of managing credit growth and asset prices in order to avoid financial instability, one really wants another instrument that acts more directly on the source of the problem. That is what macro-prudential policy is all about,” he said.

Mr Bean also said buying securities was an effective instrument for a central bank to ease financial conditions in a crisis, but short-term interest rates should be the tool of choice in normal times. “Asset purchases aimed at flattening the yield curve are probably best kept in the locker marked For Emergency Use Only,” said the paper.

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