Unprecedented attempts to stimulate economic growth may fail to bring a sustained recovery, yet withdrawing them too late could be even more risky, leading central bankers said on Monday.

Regional currencies would gain in importance, they also said after two days of talks. But the U.S. dollar still had no serious rival in playing a lead role in foreign reserves and trade settlement, according to the monetary policy chiefs from the world's major industrial and emerging economies.

The Bank for International Settlements warned that although authorities had tried to arrest sharp declines in economic output, it was still an open question whether the stimulus would lead to a sustained recovery.

Still, waiting too long to withdraw support could fuel inflation and create new imbalances, the BIS, which acts as a forum for the world's central banks, said in its annual report.

It may be too early to take exit strategies now; we don't think it's too early to talk about them, BIS general manager Jaime Caruana told Reuters Television after the bank's annual meeting.

Although it was risky to wait too long, experience suggests that the bigger risk is exiting too late and too slowly or, in the case of fiscal policy, not exiting at all, he said after the meeting at the BIS headquarters in the Swiss city of Basel.

As the financial crisis has deepened, central banks around the world have slashed interest rates and poured extra liquidity into markets, some by buying assets directly.

Governments have rushed to help banks and promised extra public spending this year worth about 2 percent of economic output of the Group of 20 nations, according to the International Monetary Fund.

Central bank chiefs attending the meeting, including European Central Bank President Jean-Claude Trichet, U.S. Federal Reserve Chairman Ben Bernanke and Bank of Japan Governor Masaahi Shirakawa, believe that eventually ending the very expansionary policies will be a major challenge.

Mexico's Guillermo Ortiz told Reuters that it may be premature to detail exit strategies as yet. Amando Tetangco of the Philippines said central banks could refrain from raising interest rates, warning that exit strategies should avoid disorderly adjustment.


The BIS said governments may not have acted quickly enough to remove problem assets from the balance sheets of key banks, instead focusing on guarantees and capital -- also exposing taxpayers to potentially large losses.

Past experience showed that the key to recovery was to force the banking system to take losses, dispose of non-performing assets, eliminate excess capacity and build their capital base.

These conditions are not being met. A significant risk is therefore that the current stimulus will lead only to a temporary pickup in growth, followed by protracted stagnation, the BIS said in the annual report.

The lack of progress threatens to prolong the crisis and delay the recovery because a dysfunctional financial system reduces the ability of monetary and fiscal actions to stimulate the economy.

The BIS, which has long warned of the dangers of asset price rises, said the crisis also showed central banks must take a more activist stance on asset and credit booms, leaning against the wind rather than mopping up the damage afterwards.

The financial crisis has shown that it is ultimately too costly for central bankers to focus narrowly on inflation, it said, noting that this preoccupation may have led some to make policy mistakes.

With the benefit of hindsight, one can see that policymakers underappreciated the extent of the slowdown in mid-2008 and the strength of the associated disinflationary forces, the BIS said.


Debate on an alternative reserve currency to the dollar also featured at the BIS annual meeting, after China and Russia had expressed concerns in recent months.

However, United Arab Emirates central bank governor Sultan Nasser al-Suweidi told Reuters that a global reserve currency other than the dollar was difficult to contemplate and plans to use a new currency would not succeed.

Malaysia's central bank governor Zeti Akhtar Aziz said Asia had not reached the stage yet of developing financial markets that would allow the internationalization of the local currencies, and the dollar still played an important role.

China and Brazil said on Sunday the two countries are working on an arrangement to allow exporters and importers to settle deals in their local currencies, bypassing the dollar.

Jassem al-Mannai, head of the Arab Monetary Fund, said on Sunday that the huge U.S. debt and moves by Russia and China to start considering another reserve unit could drag on the dollar.

(Additional reporting by Sven Egenter and Tamora Vidaillet; editing by David Stamp)