Central bankers from around the world Sunday discussed ways to prevent deflation and kick-start lackluster global growth, including unorthodox policies such as buying up financial assets.
At an annual meeting of the Bank for International Settlements, bankers faced mounting concerns that falling prices in top industrialized nations could spiral into a deflationary cycle that undermines growth.
The strategies under discussion included setting specific targets for inflation rates to prevent deflation from taking hold in advanced economies outside Asia.
Designing monetary policy to achieve a targeted inflation rate can be helpful not only to moderate price pressures but also to boost prices when they fall too low, some said.
“Everybody was very confident about it,” Gordon Richardson, former Bank of England governor, told Reuters.
“It was a theoretical discussion without any sharp corners,” said Matti Louekoski, deputy governor of the Bank of Finland.
According to several central bankers attending the discussion, Federal Reserve Chairman Alan Greenspan said measures that were once considered unorthodox might become conventional, such as buying financial assets.
“We used to watch only commodity prices, exchange rates and interest rates, but now it seems we also have to examine or monitor asset prices,” one banker said.
Policymakers are predicting a “gradual, sluggish pickup across the world moving into next year,” Sir Edward George, governor of the Bank of England, said last week.
But there is a lack of widespread confidence in this forecast, given already low interest rates, a falling U.S. dollar and stubbornly weak output in the major economic blocs -- Europe, the United States and Japan.
“We only expect very slow recovery, but of course we have some uncertainties that are more or less serious,” Louekoski said.
Even though underlying economic fundamentals remain uncertain at best, the solid rally enjoyed by stock markets in the second quarter should be welcomed as a sign of increased investor confidence, some central bankers said.
“Clearly, there is some optimism regarding the future. I take it as a good sign,” said Umayya Troukann, governor of the Central Bank of Jordan.
“If it is justified, we’ll have to wait and see, but I think it may be sustainable,” Troukann added.
Other bankers, however, said the stock market gains were simply a recovery from the paltry performance at the start of the year, helped by investors’ relief at the end of the Iraq war.
“We probably won’t see further rapid growth in the second half,” one central bank official said.
Growth this year in the world’s top industrial nations is forecast at a meager 1.7%, according to forecasting firm Consensus Economics -- no better than last year.
The Federal Reserve on Wednesday pruned a key interest rate by a quarter-point to a new four-decade low of 1%, and the European Central Bank trimmed rates earlier in June to a record low of 2%.
The Bank for International Settlements, which acts as a forum for the world’s central banks, is due to publish its 73rd annual report today.
Meanwhile, bank governors chose Jean-Claude Trichet, governor of the Bank of France, as their chairman. Trichet, who is set to succeed Wim Duisenberg as head of the European Central Bank, will succeed the Bank of England’s George, who is retiring.