Global monetary policy stimulus a “big problem,” McKibbin says


A “bubble” may be forming in global markets due to the very low base rates of interest put in place during the financial crisis and regulators must act quickly to unwind the stimulus, a central bank board member has warned.

Reserve Bank of Australia (RBA) board member Warwick McKibbin, who will be taking part in a bank meeting on Tuesday to discuss domestic monetary policy, said historically low rates were creating a “big problem” for major economies whose currencies were pegged to the US dollar.

“This is a very distortionary policy,” Mr McKibbin told an economic symposium hosted by the Whitlam Institute on Monday.

“It’s necessary, given the macro economic situation that these countries face, but it is a situation that needs to be unwound very, very quickly, not only in these economies, but also because many economies in the world are pegging to the US dollar.

“So the monetary policy in these countries, these developing countries, is the US monetary policy.”

Many countries began slashing their base rates of interest in late 2008 in an attempt to stimulate and support their economies in the aftermath of the global financial economic crisis.

The RBA cut the local cash rate to a 45-year-low of three per cent, a level it later described as an “emergency” setting, as the federal government poured money into the economy to deter it from falling into recession.

But now developing countries which were not as badly affected by the global crisis as the US were experiencing a “surge in growth” as a result of those policies, Dr McKibbin said.

“That is a recipe for a big problem down the road,” he said.

“In my view, there already is a global bubble in the making and this has to be addressed very very quickly by global monetary authorities.”

Dr McKibbin said the balance sheet of the US Federal Reserve had expanded to more than $US2 trillion following dramatic stimulus spending measures implemented during the financial crisis.

“This situation is not sustainable,” he said.

“The question is how does the US unwind the balance sheet without unnerving markets.”

A massive surge in liquidity in China was also not sustainable, he said.

The RBA board meets on Tuesday and financial market economists expect it to endorse a 25 basis point rise in the cash rate to 3.75 per cent, after hiking in both November and October.

Meanwhile, Dr McKibbin also warned a firm global emissions reduction policy was unlikely to be reached at the upcoming climate change talks in Copenhagen, Denmark, next week.

It would be more realistic for countries to implement a credible, transparent, clear set of policies given their own national circumstances and “co-ordinate that over time, building up to a global system,” he said.

“What’s going on at Copenhagen is what happened at Kyoto in 2007.

“There’ll be lots of political pronouncements, lots of good will, lots of hope, but no firm policies.”

Dr McKibbon said emissions levels were well in excess of any emissions forecasts made in 1997.

“The problem with Copenhagen is that negotiators are focusing on the wrong set of questions,” he said.

“What they’re thinking about is equality of targets, but we know what countries want.

“They want equality of effort.”

Treasury secretary Ken Henry told the symposium the carbon pollution reduction scheme (CPRS) legislation before federal parliament would change absolute prices.

“The point of the scheme itself is not to reduce the purchasing power or to reduce the real income of people where we want to see behavioural change,” Dr Henry said.

He said a policy to give households the ability to maintain their purchasing power made sense.

“Without some form of compensation to maintain real purchasing power of Australian households, it’s extremely unlikely that such a policy proposal would gain political traction.”


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