The global recovery is fragile and policymakers in advanced economies might still have to provide further economic support, Bank of England Deputy Governor Charles Bean said on Saturday.
In a paper presented at the annual central banking conference organized by the Federal Reserve, which this year is focussed on monetary policy lessons from the recent crisis, Bean said policymakers had succeeded in preventing a financial market collapse.
Even so, the deleveraging process is incomplete, the recovery remains fragile and a considerable margin of spare capacity is yet to be worked off, while further policy action may yet be necessary to keep the recovery on track, he said, according to the text.
Bean's comments come as pessimism about the global outlook increases and talk of further stimulus measures creeps back on to the agenda at the BoE and other central banks.
Most analysts, however, expect the BoE will keep policy on hold well into next year.
The Fed at its August meeting said it would resume buying long-term Treasury securities to support the flagging recovery. Former Fed Vice Chairman Alan Blinder, commenting on Bean's paper at the conference, said he believes the U.S. central bank will take further action to ease financial conditions in coming months.
The rest of Bean's speech was devoted to examining whether there were fundamental flaws in the existing policy frameworks.
He gave evidence to support the idea that periods of economic stability might encourage exuberance in credit markets. But he argued it would be a mistake for policy-makers to try to induce fluctuations in the economy to prevent financial market participants becoming too confident about the outlook.
He also said monetary policy was probably too weak an instrument to moderate credit or asset booms without hurting activity too much.
Instead, with an additional objective of managing credit growth and asset prices in order to avoid financial instability, one really wants another instrument that acts more directly on the source of the problem. That is what macro-prudential policy is all about, he said.
Bean also said buying securities is an effective instrument
for a central bank to ease financial conditions in a crisis, but short-term interest rates should be the tool of choice in normal times.
Asset purchases aimed at flattening the yield curve are probably best kept in the locker marked For Emergency Use Only, said the paper written by Bean and co-authors.
It also said raising inflation targets from the current norm of around 2 percent does not seem a productive way to pull economies out of slumps.
There is a risk ... that even a modest increase in the target of a few percentage points could lead to a corresponding increase in inflation volatility and associated welfare losses, the authors wrote.
(Reporting by Mark Felsenthal and Sumeet Desai in London, Editing by Chizu Nomiyama)