Governments must end stimulus programmes “promptly” once economic recovery bites, so as to avoid distorting markets and raising inflationary risks, a top banking body said yesterday.
“Once the recovery becomes evident, the stimulus will have to be withdrawn promptly and markets allowed to regain their role in allocating resources,” Jaime Caruana, General Manager of Bank for International Settlements, said during the bank’s annual general meeting. “Delaying the exit would perpetuate competitive distortions and risk generating inflationary pressures or sowing the seeds of the next imbalance.”
The Bank for International Settlements, or the so-called central bankers’ central bank, has a central role in setting global banking standards and in studying trends and new risks in banking.
Last year, central banks and authorities focused on preventing a meltdown in the financial sector, taking unprecedented action such as releasing billions in liquidity to get lending going, and slashing lending rates to almost zero to stimulate the struggling economy. In recent months, discussions have begun on possible “exit strategies” to unwind these extraordinary measures.
Caruana acknowledged that “implementing a timely exit will not be easy”. However, he said although there was a risk of exiting prematurely, exiting too late or not at all was a “bigger risk”.
Caruana assessed that the declines in developed countries’ economies had stabilised, and that most emerging economies had “proved less fragile” than feared.
“The consensus forecast is for a return to positive global growth later this year,” he said. “Even so, the path to a self-sustaining recovery is fraught with risks, and the nature of the destination – the new normal – remains shrouded in thick fog.”
Caruana said for now, it is important for repairs to the financial system to continue. These include booking losses, disposing of bad assets, recapitalising and restructuring the system, restoring the competitive equality and removing excess capacity.
He noted that factors hindering a complete clean-up included the large cross-border operations of affected institutions, and the complexity of financial structured products.
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