MNI INTERVIEW: BIS Borio: Will Be Hiccups As MonPol Normalises

--Borio Sees Risk of a Global Debt Trap

--Borio: Central Banks Have Been Overburdened For Far Too Long

By Christian Vits

     FRANKFURT (MNI) - The road to exit extraordinary central bank measures and

to reach higher interest rate levels may be bumpy, Claudio Borio, Head of the

Monetary and Economic Department at the Bank for International Settlements told

MNI in a recent exclusive interview.

     "After such a long period of unusually low interest rates, coupled with

growing central bank balance sheets, normalising policy presents serious

challenges, not least as the global economy has seen a further increase in debt

levels in relation to incomes and output," Borio said.

     "What is clear is that normalising policy will not be without hiccups. For

instance, it would be unrealistic not to expect bouts of market volatility, as

confirmed by the recent wobbles in the U.S. stock market."

--SIDE EFFECTS

     Borio highlighted the side effects that could be seen if interest rates

stay unusually low for unusually long. 

     They can delay balance sheet repair; hurt banks' and other financial

institutions' profits, and hence resilience; induce a misallocation of

resources; and encourage risk-taking in financial markets, he argued.

     Low rates for long also reduce the opportunity cost of keeping

non-performing loans on banks' books, possibly slowing down their resolution and

there is an increasing incidence of so-called Zombie firms, whose profits do not

cover interest payments, Borio added.

     The BIS's Chief Economist also implicitly warned central banks not to wait

for too long to start the process of policy normalisation.

     "Those costs need to be balanced against the well-known benefits, as low

rates boost economic activity and help bring inflation back to target. And,

indeed, economies are back on track," he underlined. "Of course, as economies

improve, the balance between the benefits and costs of persistent unusually low

rates tends to deteriorate."

--DEBT TRAP RISK

     Against the background of global policy accommodation, Borio sees "a risk

that the global economy might fall into a kind of debt trap, if policies in

general are unable to address the build-up of debt." 

     Higher debt levels going hand in hand with lower interest rates "will make

it harder to raise those rates to historically more normal levels. In turn, this

would reduce the policy room for manoeuvre and complicate dealing with the next

recession," he stressed.

     At the same time, Borio does not see an increasing danger that central

banks are falling behind the curve. "What I see is the continuation of the

challenges central banks have been facing for some time. They are fully aware of

the risks involved."

--TRADE TENSIONS

     With regard to the recent debate over new protectionist measures, Borio

took a clear position: "Trade wars can have no winners, only losers."

     Were the world to turn more protectionist, "there would be untoward

implications for inflation too. In the short run, this would tend to raise

prices and costs," he said. "And if a broader change in regime took place,

giving labour and firms more pricing power and undoing some of the beneficial

effects of globalisation, this could provide a more fertile ground for

inflation."

     Given that the global economy has seen a further increase in debt levels,

normalising policy "is a narrow path, complicated more recently by the

protectionist rhetoric that has been gaining ground," he stated.

     The outlook for inflation is somewhat mixed, according to Borio. "It is a

tug-of-war between opposing forces" as many economies reach their capacity

limits simultaneously and battle structural disinflationary forces. 

     "The longer the expansion continues, the more likely it is that the former

will gain the upper hand," he said.

     Monetary policy cannot tackle all challenges central banks face at the

moment. "Monetary policy requires the support of prudential, fiscal and

structural policies," Borio warned. "Central banks have been overburdened for

far too long."

--MNI Frankfurt Bureau; +49 69 97782671; email: christian.vits@marketnews.com

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