Policy-makers must avoid economic bubbles fostered by expectations that interest rates will remain low, Bank of Japan (BoJ) Governor Masaaki Shirakawa told an annual summit of central bankers in the United States. Shirakawa's emphasis on the risks of ultra-low interest rates came as other officials at the event fretted that central bankers should not withdraw support for economies too quickly as the recovery from the financial crisis remains fragile.
"Monetary policy should avoid accelerating a bubble through creating unfounded expectations for the continuation of low rates," Shirakawa said at the Kansas City Federal Reserve's annual retreat, the text of his August 22 speech showed on Monday.
Federal Reserve Chairman Ben Bernanke, European Central Bank President Jean-Claude Trichet and central bankers from other major economies at the weekend gathering in Jackson Hole, Wyoming, discussed the financial crisis that spread from US mortgage defaults in 2007.
Central banks around the world have begun debating how and when to phase out emergency steps taken to contain the damage wrought by the worst global crisis in decades, but most are not expected to do so until well into next year. A series of speakers hailed the global economy's apparent push out of a deep slump. France, Germany and Japan have just emerged from the global recession sparked by the financial meltdown, while the US economy is also showing signs of improving.
But they said economies were recovering only with extraordinary stimulus from governments and central banks, and policy-makers should ensure that stimulus is not withdrawn too soon. "Shirakawa's point about the need to prevent future bubbles is weighing more on minds of central bankers, so maybe they do have to be a little more careful," said David Cohen, director of Asian economic forecasting at Action Economics in Singapore.
"As for near-term policy, the BoJ, like other central banks, will remain patient." Shirakawa said expectations that rates would remain low in major economies had contributed to the global financial crisis.
Critics have also argued that Alan Greenspan, who stepped down as Fed chairman in 2006 after 18 years at the job, kept rates low for too long, fuelling a housing bubble that contributed to the crisis. Greenspan has defended his record and maintained that bubbles cannot be detected until they burst.
Shirakawa said that on monetary policy it is up to each country's central bank to "put its own house in order". It is also important for central banks to cooperate on financial regulation and providing liquidity in money markets, he said. While co-operation is necessary, it is likely to be imperfect as each country has its own level of protection for depositors and creditors, he said.
"Dollar funding operations, carried out under co-ordination between major central banks, have been highly effective," Shirakawa said. "That point is markedly different from international policy co-ordination in monetary policy, (which can) easily place strains on bilateral relations in key variables, such as foreign exchange rates and the balance of payments." The Fed, which has set its benchmark interest rate at virtually zero, has since focused on driving down other borrowing costs by buying mortgage-related debt and US government bonds.
The ECB is also buying bonds backed by mortgages or public-sector borrowing and has held its main interest rate at a record low of 1 percent. The Bank of England, which set rates at 0.5 percent, unexpectedly decided earlier this month to increase its buying of government bonds.