The job of fixing financial markets is by no means over, and what does or does not happen over the next two years will be crucial, Bank of Canada Governor Mark Carney said at the World Economic Forum annual gathering of the world’s financial elite in Davos, Switzerland.
Here’s a quick summary of the governor’s remarks:
- The global economy isn’t completely out of the woods yet
Bailouts and tighter banking rules haven’t eliminated the “tail risks” to the global economy and the stability of financial markets. The next bit of financial reform will have to increase oversight of the shadow banking sector (that is, institutions that in some ways operate like banks but have so far escaped stricter rules) and over-the-counter-derivatives, which are privately negotiated and have remained unregulated. These have contributed to exacerbating the crisis in 2008, and might do so again if left unchecked, the governor argued. The remarks were interpreted as a warning that the Financial Stability Board, an international financial regulator which Carney currently heads, will be soon tackling these issues.
- Central banks can’t do it all
Central banks, which have aggressively sought to stimulate growth in many advanced economies by keeping interest rates at rock-bottom and pumping money into the economy, can’t restore lasting global growth on their own.“There is not an ability of central banks to take all this risk out or set the seeds for a sustainable recovery,” Carney said. Sensible fiscal policy and structural reforms to eliminate the remaining vulnerabilities that permitted the 2008 crisis are essential parts of the cure, the governor noted.
- But monetary policy hasn’t run out of options
Still, Carney rejected suggestions by co-panelist Angel Gurria, head of the OECD group of rich countries, that central banks have run out of tools to prop-up fledgeling economic recoveries around the developed world. Monetary policy options haven’t been “maxed out,” the BoC chief argued.
The remark also ran counter the position of Sir Mervyn King, current governor of the Bank of England, which Carney will start heading in July. Speaking to reporters this week, King said he believed the bank had run out of means to boost Britain’s economic growth. Carney refused to elaborate on whether the remaining policy options he alluded to include NGDP targeting, a controversial measure the governor praised in a December speech and that has made him the target of some criticism in Britain. (Stephen Gordon explains what NGDP targeting is here.)
- Japan isn’t trying to make the yen depreciate
Carney also vigorously defended “Abenomics.” That’s what foreigners call a mix of reforms that Japan’s Prime Minister Shinzo Abe hopes will dig his country out of 15 years of deflation and stagnation, but that some have painted as a stealth attempt to get the perennially strong yen to depreciate and thus artificially boost Japanese exports. The Bank of Japan’s expansionary policy, Carney said, was aimed at restoring a healthy pace of inflation domestically, not at influencing the currency value. Of course, he said, monetary policy, especially in big economies like Japan, inevitably has spill-overs in the exchange markets, but central banks can tame such side-effects if they move slowly towards their inflation target.
- Canada will move slowly on tightening monetary policy because of the housing market
Canada wasn’t the focus of the panel discussion the governor was participating in, but Carney did hint, in passing, that the BoC is willing to put up with higher than two per cent inflation in order to avoid hurting highly indebted Canadian households by raising interest rates too quickly.
“In the case of my central bank,” he noted, “if you were returning to inflation from below and you had potential issue with rising household credit, you might take a little longer to return to two per cent [inflation].”