Greater challenges and scrutiny lie ahead for central banks
The next decade is likely to see a rate of change not witnessed before, which will require financial markets and policymaking to be agile
A few months ago we marked the 10-year anniversary of the collapse of Lehman Brothers and the start of an eventful period for financial markets and policymakers. The past decade was characterised by strategies to deal with the aftermath of the 2008 financial crisis through a combination of “firefighting” and trying to correct the fault lines of the crisis.
Major central banks found themselves in unfamiliar territory. They relied increasingly on a broad set of unconventional policies, the most prominent being quantitative easing (QE), to boost inflation, support growth and reduce unemployment. Many commentators warned at the time that the longer central bankers went down that route the more complex the exit would be. Some countries are still implementing QE, while others are withdrawing such measures. As this “great exit” unfolds and central banks pursue monetary policy normalisation and look to shrink their balance sheets, debates continue to rage about the success, or otherwise, of these unorthodox policies.
From an African perspective, QE programmes produced mixed results.
While the global economy emerged from recession in the fourth quarter of 2009, the pace of growth since has been lacklustre. Many have argued that successive rounds of QE only encouraged risk taking in the financial economy rather than in the real economy.
There does, however, seem to be consensus that QE played a crucial role in containing the crisis and that central banks had little choice as “other policymakers were paralysed by dysfunctional politics” as Mohamed El-Erian says in his book The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse. It remains to be seen which of the unconventional tools devised during this period will be migrated into the conventional toolkit of central banks.
From an African perspective, QE programmes produced mixed results. The initial strong inflows of capital as part of search-for-yield strategies and favourable financial conditions allowed many sub-Saharan African countries to finance their deficits more easily, leading to a surge in euro-dollar issuances. But the great exit is proving to be a challenge for many of these countries and those nonfinancial corporates that relied too heavily on a cash-flush system and cheap valuations to increase their leverage but paid too little attention to structural reforms and improving their economic and financial resilience. Now they are finding it harder and more costly to meet their external financial obligations.
Another key feature of the financial market and policymaking landscape since 2010 has been the changing role of central banks. Leading up to the financial crisis, central banks focused primarily on achieving and maintaining low and stable inflation, deemed necessary to create an environment conducive to sustainable economic growth. While the future primary role of central banks and monetary policy will remain medium-term price stability, lessons from 2008 clearly point to the need to give broader financial stability more prominence.
The rationale for the increased focus on financial stability is informed by the increasing interdependence of economies, the interconnectedness in the global financial system, and the systemic nature of risks brought about by this kind of integration. Policymakers will continue to grapple with how best to manage the relationship between price and financial stability as well as macro- and micro-prudential policies. The future will tell whether we will see more co-ordination or whether we will move towards more integration.
It is said that “prediction is very difficult, especially if it is about the future”. The next decade is likely to see a rate of change not witnessed before, which will require financial markets and policymaking to be agile.
The opportunities and threats in the wake of rapid technological advancement will become more difficult to distinguish. One key theme that will shape the next decade will be the rise of financial technology. This will demand a careful balance between not stifling innovation while ensuring the safety and resilience of financial systems. Institutions must continue to improve the resilience of the global financial system and guard against the erosion of hard-won international regulatory reforms while closely monitoring for any unintended consequences and adopting corrective measures. And, as ever, appropriate governance and conduct standards must be enforced to strengthen the integrity and reputation of financial markets and participants.
Given their expanded role and growing demands from society, central banks can expect to face more scrutiny than was historically the case and, in some circumstances, challenges to their mandates and independence. An important aspect of ensuring appropriate mandates and defending independence will be enhancing communication strategies and higher degrees of transparency, to facilitate holding them accountable in view of their expanded responsibilities.
• Mminele is deputy governor of the SA Reserve Bank. This article was adapted from a piece published in the 100th edition of the Official Monetary and Financial Institutions Forum bulletin.