BEIJING. — “The central bank is neither God nor a magician who can turn uncertainties into certainties.” So, Zhou Xiaochuan, governor of the People’s Bank of China, this week articulated the fear haunting markets. Since the global crisis erupted in 2008, monetary policymakers have pulled off one conjuring trick after another to stabilise the financial system and pull their economies out of recession.
Now, as they push unconventional tools to their limits, investors are losing faith in their powers.
Whether it is the collapse in commodity prices or the outlook for China’s currency, the decline in global trade or the absence of inflation, there are plenty of worries to explain the recent volatility in markets. Yet there is also a sense that central banks are becoming part of the problem.
The US Federal Reserve faces growing criticism over its decision to raise interest rates in December while the embrace of negative interest rates in the eurozone and Japan has precipitated a sell-off in banking shares.
The overarching concern is that central banks are running out of fire-power. With interest rates close to historic lows across the developed world, conventional tools are exhausted.
Quantitative easing is delivering diminishing returns. There is scope to push interest rates further into negative territory, but this is an early stage experiment and the risks of unintended effects make it preferable, where possible, to wait and assess the initial impact.
In the measured wording of the Fed’s minutes, policymakers are no longer “well positioned to help the economy withstand substantial adverse shocks”.
This is the backdrop to the call from the OECD, the Paris-based club of mostly rich nations, for governments to lead a stronger collective stimulus to boost flagging global demand.
Relying on monetary policy alone, the OECD argues, will not be enough to raise living standards or reduce inequality, especially given the risks of financial instability spilling over into the real economy.
Since many countries are able to borrow at very low cost, they should do so, using the proceeds to invest in infrastructure.
There is little prospect of governments heeding this call when G20 finance ministers meet in Shanghai next weekend: those countries most able to increase spending would be least inclined to do so. Nonetheless, the OECD is right to make the argument.
Central banks have not yet exhausted their options. The Fed, whose December move increasingly looks premature, could signal more clearly that it no longer assumes the next move in interest rates will be upwards.
The European Central Bank and the Bank of Japan can and should ease policy further. But there is a limit to what central banks can achieve alone.
Governments need to take their share of responsibility for growth. ECB policymakers have been forthright in calling for fiscal measures to support monetary easing. — FT.