Bank of Japan (BOJ) Governor Masaaki Shirakawa said central bankers must consider the dangers of keeping interest rates low for too long as they seek to strengthen the global recovery from the 2008 financial crisis.
“If low interest rates induce investment projects that are only profitable at such interest-rate levels, this could have an adverse impact on productivity and growth potential of the economy by making resource allocation inefficient,” Shirakawa said on Saturday at a US Federal Reserve conference in Washington.
Central banks across the developed world have maintained record-low borrowing costs, with the Fed saying it is likely to keep its main rate close to zero through at least late 2014 to reduce unemployment. The BOJ has held its benchmark interest rate below 1 percent for more than a decade as monetary stimulus failed to revive consumer spending following the collapse of a real-estate asset price bubble in the 1990s.
Photo: Reuters
A comparison of Japan after its 1997 banking crisis and the US after the housing-market bust show “surprisingly similar trends,” and the BOJ and the Fed responded in similar ways as well, Shirakawa said. He spoke on a panel that included Federal Reserve Vice Chairman Janet Yellen and Bank of England Governor Mervyn King.
“Extraordinary easy monetary policy,” either through interest rates or central-bank asset purchases, “will not solve the -underlying balance-sheet problems,” Jaime Caruana, general manager at the Bank for International Settlements in Basel, Switzerland, said on Saturday at the conference. “This policy can buy time, but it is very important that this time is used properly to address the roots of the problems.”
Central banks “need to do more to promote effective balance-sheet repair,” he said.
Both Shirakawa and King warned that a move into financial policy subjects central banks to greater accountability. US central bankers are facing resistance from financial firms as they use their powers to increase capital standards, and scrutinize compensation and dividend policies, tasks that bank boards of directors once performed with a higher level of autonomy.
Central bankers should find it “straightforward” to be accountable for their policy toward inflation, Shirakawa said.
That is what the public demands for entrusting monetary policy to a “technocratic institution,” he said.
“Macro-prudential considerations are much more nebulous,” he added, and contain more elements of “art rather than science — and will inevitably test the limits of democratic deference to the conduct of monetary policy.”
King also urged central bankers to give “careful thought” to ensuring adequate accountability on regulation.
“It will be pretty crucial to explain what we are doing and why,” he said.
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