Bank Of England Chief Warns Central Banks Aren’t Prepared To Combat Next Recession

Topline: The global economy is heading for a “liquidity trap” and central banks are running low on ways to fight a future recession, warned Mark Carney, governor of the Bank of England, in a recent interview with the Financial Times.

• In his wide-ranging and exclusive interview with the Financial Times, the Bank of England governor stated his concern that central banks around the world are ill-prepared to prevent the next major economic downturn.
• The greatest concern for the British economy and those of other advanced countries is how central banks would be able to combat a future economic recession, and monetary policy alone may not be enough to do so, Carney said.
• The outgoing Bank of England chief also warned that the global economy is heading for a “liquidity trap,” which occurs when monetary policy loses all effectiveness and fails to encourage any additional spending.
• “It’s generally true that there’s much less ammunition for all the major central banks than they previously had and I’m of the opinion that this situation will persist for some time,” he said. 
• Like other bank leaders, such as the European Central Bank’s Mario Draghi and his successor, Christine Lagarde, Carney argues that governments should also use fiscal policy tools like tax cuts or boosts to public spending to combat a future recession.
• While he worries about monetary policy’s effectiveness in a downturn, Carney also said that his successor, Andrew Bailey, still has tools to mitigate any economic risks: The Bank of England could cut interest rates further, for example, from 0.75% to close to zero, as well as relax banks’ capital requirements to enable additional lending.

What to watch for: Carney did admit that previous rate cuts from the U.S. Federal Reserve and European Central Bank were starting to flow into the global economy, but he emphasized the need for fresh supplements to monetary policy. “If there were to be a deeper downturn, [that requires] more stimulus than a conventional recession, then it’s not clear that monetary policy would have sufficient space,” he said.

Crucial quote: “We . . . have a statutory responsibility to identify the major risks to financial stability,” Carney said in the interview. “We can’t dodge that.” The Bank of England governor, who is set to depart his post on March 16, also quipped: “Hopefully [a recession] doesn’t arrive in the next 69 days.”