A report signed off by Reserve Bank governor Philip Lowe has endorsed the use of unconventional monetary policies in the post-crisis era. Disturbingly, however, it contains a voluminous list of material side effects and, more than a decade after the crisis, says it is too early to assess some of their long-term implications.
While the report from the Bank for International Settlements (BIS) describes the unconventional policies as valuable additions to the central banking toolbox and is largely positive in its commentary on their effectiveness, there is increasing debate within central banks about their continued deployment this distance from the crisis.
Those critical of the continuance of policies put in place in response to a financial crisis more than a decade ago place more weight on the side effects than the BIS report, which nevertheless has a very long list of them.
One obvious unintended consequence of the policies - a current topic of debate in this market - is their impact on bank net interest margins and the profitability and stability of banking systems.
Another is the distortion of pricing and risk signals that leads to inefficient allocation of credit and capital and incentives to increase leverage – the world is far more leveraged today than it was in 2008.
The use of the policies clearly increases moral hazard and risk-taking, with markets demonstrating repeatedly that they are banking on being bailed out by central banks whenever asset valuations appear under pressure and also contributes to wealth inequality, rewarding those with financial and property assets and punishing savers.
