Bank of England boss Mark Carney has accused the G20 of failing to adopt measures to boost global growth as he defended central banks and their power to play a role in stimulating economic growth following attacks from critics who say they have run out of ammunition.
Speaking at a meeting of G20 finance ministers and bank governors in Shanghai on Friday, Carney turned on City economists who say the world’s major central banks have done all they can to prevent the global economy from slipping back into recession.
He said: “Several commentators are peddling the myth that monetary policy is ‘out of ammunition’. This is wrong, but the widespread absence of global price pressures demands that our firepower be well aimed.”
The Bank of Japan recently joined the European Central Bank, the Danish central bank, the Swedish Riksbank and the Swiss National Bank in cutting rates to below zero to rescue their economies from deflation and the prospect of recession.
The Federal Reserve raised interest rates in December to calm what it thought was a strongly growing US economy, but a string of poor economic figures since then has put pressure on Janet Yellen, the Fed chair, to reverse the policy at the central bank’s next meeting in March.
Carney has hinted that he is prepared to cut the base rate from 0.5%, but has ruled out following the trend for negative rates, saying it would damage the stability of UK banks and building societies.
William White, a former chief economist of the Bank for International Settlements (BIS), the central bankers’ club, who now chairs the OECD’s review committee, warned that central bankers had “used up all their ammunition” ahead of the World Economic Forum gathering in Davos last month.
Amid steep falls in stock markets that some economists said were a sign of panic among global investors at the worsening economic outlook, he said: “The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up.
“Debts have continued to build up over the past eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief.”
The BIS was one of the few organisations to warn during 2006 and 2007 about the unstable levels of bank lending that eventually led to the Lehman Brothers crash.
Carney, who is also head of the G20 financial stability board, said the banking system remained strong despite the recent downturn and could withstand shocks from volatile markets.
He added that central banks still had a role to play to boost lending and confidence among businesses and consumers, but politicians should not rely on cuts in interest rates and quantitative easing to turn around an “unforgiving” global economy.
He accused G20 governments, which include the UK, US, Brazil, China, France, Germany, India and Indonesia, of failing to keep their side of a bargain that meant ending trade protections and enacting financial reforms to boost growth.
“At the Brisbane summit in 2014, the G20 leaders agreed an ambitious goal to lift the level of G20 GDP by at least 2% by 2018. But only 18 months on, the two in five commitments are starting to look more like the 5/2 diet.
“Less than half of the measures have been implemented, and only around one third of the promised impact on global GDP has been delivered. Moreover, whilst implementation has lagged, the need to boost growth has increased in size and urgency.”
He said the Bank of England expects the level of global GDP in 2018 to be more than 3% below what the IMF expected at the time of the Brisbane summit.
“We need to live up to China’s G20 priorities: structural reforms with a long-term focus but a short-term implementation horizon, determined reform of the global architecture for sustainable capital flows and the development of our essential macroprudential frameworks and the implementation of our financial reform commitments to address new vulnerabilities.”
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