It's Time to Fire Up All Engines to Boost World Growth, BIS Says

01 Jul 2019, 11:50 AM IST

(Bloomberg) -- Governments must step in to boost their economies and redress policy imbalances that have forced central banks to use up most of their firepower, according to the Bank for International Settlements.

The Switzerland-based BIS, which promotes cooperation among the world’s monetary officials, used its annual economic report to urge politicians to “ignite all engines” to overcome a global soft patch. They should make structural reforms and strengthen fiscal and macroprudential measures, instead of relying on ever-lower interest rates in a debt-fueled growth model that risks turbulence ahead.

It's Time to Fire Up All Engines to Boost World Growth, BIS Says

“The continuation of easy monetary conditions can support the economy, but make normalization more difficult, in particular through the impact on debt and the financial system,” the BIS said. “The narrow normalization path has become narrower.”

U.S.-led protectionism has dented economic confidence and slowed growth, forcing central banks to prepare to ease policy again even if they haven’t yet returned to their pre-crisis settings. The Federal Reserve and the European Central Bank are expected to cut interest rates this year, while nations including Australia, Russia, India and Chile have already started.

Economists at Citigroup Inc. estimate that while fiscal policy in the major industrial countries will be expansionary this year it will be less so in 2020 as past measures in the U.S. wear off.

The BIS has long called for higher interest rates to prevent asset-price bubbles, but it says regaining the monetary space to do so has been harder than expected. The ECB and the Swiss National Bank still have record-low rates, below zero, and now inflation expectations in developed nations have plummeted.

Lackluster bank profitability due, in part to non-performing loans as well as negative rates, could exacerbate a downturn, the BIS said. A particular area of concern is corporate debt, after a “remarkable” growth in leveraged loans.