Crisis warnings mount as BIS calls for end of ‘whatever it takes’ policy

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The Bank for International Settlements has said the world’s central banks need to scale back their ultra-loose monetary policy, arguing this now could be doing more harm than good.

In its annual report, the Basel-based organisation – which is known as the central banks’ central bank – says the time for “whatever it takes” monetary policy has come to an end and calls on governments to look at addressing structural problems to restore growth.

The group also warns that quantitative easing and zero interest rates could already be doing more harm than good, saying the “cost-benefit balance is inexorably becoming less and less favourable”.

“Central banks have become increasingly overburdened, as they have been relied on heavily for years to stimulate economies through very accommodative monetary policies,” says the BIS.

“There are growing concerns at this juncture about the effectiveness of these policies and their negative side effects. Monetary accommodation can only be as effective as the balance sheet, fiscal and structural policies that accompany it.”

The report comes after the US Federal Reserve last week said it would consider easing the pace of its $85bn-a-month bond-buying programme later in the year if the recovery in the world’s largest economy continues as expected. This caused a drop in stockmarkets and a spike in bond yields as investors contemplated the problems caused by the withdrawal of such a large stimulus effort.

The BIS says: “The eventual exit from current policies also presents first-order challenges, some purely technical and others of a more political economy nature. Tools to manage the exit are in place and have been tested to some extent. But central banks are mindful of the fact that the size and scope of the exit will be unprecedented.

“This magnifies the uncertainties involved and the risk that it will not be smooth. Moreover, the longer the current accommodative conditions persist, the bigger the exit challenges become. This puts central banks in a very uncomfortable position and highlights the need to address the economies’ underlying balance sheet and structural problems without delay.”