Central Banks may face further tasks, Bank of England warns

Central banks may have to provide more economic support amid a fragile
global recovery, the deputy governor of the Bank of England has warned.

Charles Bean said policymakers had prevented a financial market collapse
but further action might be required.

He was speaking at the Economic Policy Symposium in Jackson Hole,
Wyoming.

At the same event, US Federal Reserve chief Ben Bernanke set out
“unconventional” policy options to boost the US economy.

The event, which attracts leading central bank figures, is this year
focused on monetary policy lessons from the recent crisis.

‘Emergency Use Only’

Presenting a report to the conference, Mr Bean said that the Bank of
England had been unable to prevent the crisis because its powers – primarily
the setting of interest rates – were not powerful enough.

He also hinted that there may be a need to increase so-called
quantitative easing – the pumping of new money into the economy.

“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.

But he added that “normal times will surely return in due
course”.

Mr Bean also said that government purchase of securities – such as bonds
and shares – was an effective way for central banks to ease financial
conditions in a crisis.

However, he insisted that adjustments to interest rates should be used
in normal times, with asset purchases “best kept in the locker marked For
Emergency Use Only,”

Bank reserves

Later this year, the coalition government will unveil details of new
powers for the Bank to try and head off any future crisis.

And Mr Bean used his speech to set out examples how these could underpin
“macro-prudential policy” under the Financial Regulations Bill.

These included forcing banks to build up reserves in good times to help
them weather downturns, and imposing restrictions on how much money mortgage
lenders would provide.

“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,” he said.

“That is what macro-prudential policy is all about.”

Mr Bean’s speech came after data showed that the UK economy grew by more
than initially thought in the second quarter of 2010, boosted by a strong
performance by the construction sector.

The economy grew by 1.2% in the quarter, the Office for National
Statistics (ONS) said, revising up its initial estimate of 1.1% growth.

That was the fastest rate of quarterly expansion recorded since the
first three months of 2001.

But most economists do not expect this level of growth to continue.

Meanwhile, the US Commerce Department revised down its growth estimate
for the second quarter.

It now says the US economy grew at an annual rate of 1.6%, down from its
first estimate of 2.4%.

Of the policy options set out by Mr Bernanke, top of the list is more
quantitative easing.

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