Central banks must rely on the government to generate economic recovery
Just eight months after the authorities took action to avert a recession, central banks are having trouble relying on the government to spur economic recovery.
The monetary authorities entered the Covid-19 crisis with the most common policy instrument being the rate cut, a tool in use in any post-war recession.
After lowering interest rates to near or even below zero and launching massive asset purchase programs, central banks are practically looking for government support.
Without today’s strong fiscal stimulus, the danger is that economies will form deep scars that hamper long-term growth. That could then leave central banks unable to reset and prepare for the next shock or recession. Monetary policy and the current fiscal policy are interdependent.
Mr. Torsten Slok, chief economist at Apollo Global Management Inc, said: “This is definitely a new regime, simply demand in the global economy is not large enough and monetary policy cannot create demand. bridge”.
US Federal Reserve Chairman Jerome Powell and European Central Bank President Christine Lagarde both noted the risk of lasting damage to the labor market from the Covid-19 crisis in their speech at the forum. Annual ECB on Thursday (November 12).
“Even after unemployment drops and vaccination, there will probably be a significant group of workers in need,” said Powell on Thursday (November 12).
Currently, government aid is present to help maintain employment and productive capacity. But it is worrying that government support will be withdrawn due to public debt concerns even as the virus continues to rage.
“Great financial support has preserved production capacity. It is important that this support be maintained and in some regions even expanded in the coming months, ”ECB Vice President Luis De Guindos said at an online conference on Thursday.
“Right now, fiscal policy is doing the right thing and monetary policy is playing a difficult role. Most central banks today say that this is the right policy at the moment, but I’m not comfortable with it, ”said Erik Nielsen, Chief Economist at UniCredit SpA.
“In the current environment, monetary and fiscal policy are working in harmony. Their respective goals are consistent. But we should not pretend that such harmony will be a permanent condition, ”said Jens Weidmann, President of the Bundesbank on November 5.
Every central bank leader knows what is at the end of a policy response that fails to restore the long-term growth path of the economy, similar to Japan’s.
A Bloomberg survey in October found that a majority of forecasters do not expect the Bank of Japan to tighten monetary policy again, even in the long term.
According to Bloomberg, Japan’s central bank has effectively lost its monetary instrument. Japan’s central bank adjustments in recent years, including the introduction of a commitment to exceed the 2% inflation target, have not produced a noticeable response.