Too much of what used to be a good thing

While we should be grateful that central banks stepped in to save the day during the global financial crisis, they should now be taking a different stance.

It's high time central banks alter their very accommodative monetary policies, says a Swiss Re report ("Growth Recipes: The need to strengthen private capital markets"). These are distorting the proper functioning of the financial markets and not incentivising governments to tackle structural reforms.

The report goes on to say that such policies dis-incentivise long-term investments, fuel asset price bubbles and aggravate income inequalities. Moreover, the consequent rock-bottom interest rates are like a tax on savers and prompt investors to “hunt-for-yield”, which ultimately puts financial stability at risk.

Says Swiss Re's investment strategist, Jerome Haegeli: "Less is more" when it comes to ultra-loose central bank interventions. To move beyond the current cyclical uptick, the focus should be on improving the structural growth outlook."

Finally, the low interest-rate environment in recent years has not helped economic growth. Instead of consuming more, households have increased their savings. Despite the abundant central bank liquidity, investment growth has failed to pick up.

In sum, things have reached a point where the cost of central bank actions outweigh their benefits. To support economic growth, it's crucial that governments now implement growth-enhancing structural reforms.

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