Central Banks Search for New Ideas

Policy makers look for innovative ways to unclog lending and encourage economy.

Central banks are digging deeper into their tool kits in search of innovative ways to unclog bank lending and keep a weakening world economy afloat.

With the fifth anniversary of the financial crisis approaching in August, policy makers from the Federal Reserve, the European Central Bank and the Bank of England all meet within 24 hours next week. Central banks, facing a global recovery that’s sputtering even after they delivered trillions of dollars of liquidity and near-zero interest rates, are having to consider fresh strategies to combat the slowdown.

‘Exceptionally Low’

“The global macroeconomic environment is softening,” Carlo Bozotti, chief executive officer at STMicroelectronics NV, Europe’s largest chipmaker, said July 24 as he indicated third-quarter sales may miss analysts’ estimates amid weaker demand.

Mortgage Securities

Bernanke himself told Congress this month that the Fed is considering a range of further options to ease policy in case the faltering economic recovery fails to lower unemployment.

‘Highly Critical’

Such a strategy probably would be met by opposition from congressional Republicans, who are already concerned that the Fed is risking future inflation with its easy money policies.

Emergency Loans

Other options include mimicking the Fed by giving greater guidance over the future direction of interest rates and lowering bank reserve requirements, said Schumacher in Frankfurt.

Quantitative Easing

The ECB will ultimately be forced to consider policies it previously resisted, namely quantitative easing to avert deflation and supersizing Europe’s rescue fund by giving it access to central bank cash, said David Owen, chief European financial economist at Jefferies International Ltd. in London.

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