Monetary policy may encourage excessive risk-taking in markets

BANK of England Governor Mark Carney warned easy monetary policy could prompt excessive risk-taking in financial markets.

   Two days after the European Central Bank announced a 1.1 trillion-euro ($1.23 trillion) quantitative-easing program, Carney said six years of sustained monetary stimulus was justified on an economic basis, yet could carry a downside if it overheated markets.

   “In an environment of low interest rates, and low interest rates for a period of time, and also quantitative easing, there can be excessive risk taking,” Carney said during a Saturday panel at the World Economic Forum’s meeting in Davos, Switzerland. “What those monetary policies are looking to do is move from an environment of reticence to take risk to responsible risk-taking. We’re trying to avoid reckless risk-taking.”

   Rock-bottom interest rates and asset-purchases have been deployed by central banks to drive their economies from recession and then ensure a recovery. The MSCI World Index has climbed almost 50 percent since the start of 2010 and bond yields have slid worldwide.

   “QE creates in some markets some distortions,” said BlackRock Inc. Chief Executive Officer Laurence Fink, who moderated the panel. “It moves huge volumes of money into the equity markets.”

   Carney said policy makers had taken steps to ensure financial stability and that investors should realize central banks won’t come to the rescue when markets do slide and be alert to an “illusion of liquidity.”

   “If we have tough supervision we feel safer to have loose monetary policy,” ECB Executive Board member Benoit Coeure said.

    The ECB’s adoption of QE and a halving in the price of oil since June signal that the world economy may do better than some investors expect, Bank of Japan Governor Haruhiko Kuroda said.

   The International Monetary Fund this week made the steepest cut to its global-growth outlook in three years, reducing its forecast for 2015 to 3.5 percent from 3.8 percent in October.

   Pessimism “is a bit exaggerated,” said Kuroda. “By making this big decision the euro zone could recover strongly and deflationary pressures could be eradicated. That would be great for the global economy.”

  Carney said he was “cautiously optimistic about the global outlook,” pointing to the U.S. recovery and the possibility that oil could be “lower for longer.” He said there was a “big difference” in the path of monetary policy implied by the Federal Reserve’s forecasts and that anticipated by markets.

   “That gap will close somewhat this year and the question is in what direction will close and what impact that will have on volatility,” he said.

  On the U.K., Carney said it has a “very low inflation environment right now largely caused by commodity prices” and that the BOE has “an ability to look through that.” Consumer-price growth cooled to 0.5 percent in December, well below the BOE’s 2 percent goal.

   “We have the means, the responsibility and the will to return inflation back to target in the two-year horizon,” he said.

   Coeure explained the ECB’s embrace of further stimulus by noting weakening prospects for inflation and said governments now had a responsibility to overhaul their economies.

   “We had to do something,” he said. “We can’t do everything for Europe. We all have a job to do, we’ve done our part.”

   Kuroda made a similar call on his own government to make “necessary structural reforms as quickly as possible.”

   On emerging markets, Fink said while the “marketplace is starting to lose its patience” with them, he viewed the recent decline in sentiment toward developing nations as an opportunity to invest in some places, such as Brazil.