Carney: economy risks being trapped in low inflation

Speaking at the Annual Institute of International Finance G20 Conference in Shanghai, Carney said:

"For the past seven years, growth has serially disappointed - sometimes spectacularly, as in the depths of the global financial and euro crises; more often than not grindingly as past debts weigh on activity".

"It doesn’t take a genius to recognise that a prolonged period of low interest rates can lead to a build-up of vulnerabilities which could derail an expansion and deepen a subsequent recession."

Renewed appreciation of the weak global outlook appears to have been the underlying cause of recent market turbulence, he said, stating that the latest freefall in commodity prices has reinforced concerns about the sluggishness of global demand.  

However he warned against central banks adopting negative interest rates saying that "there are limits to the extent to which negative rates" can boost domestic demand.

Carney said:

"For example, banks might not pass negative policy rates fully through to their retail customers, shutting off the cash flow and credit channels and thereby limiting the boost to domestic demand. That is associated with a commonly expressed concern that negative rates reduce banks’ profitability.

"To be clear, monetary policy is conducted to achieve price stability not for the benefit of bank shareholders."  

Continuing, he said that banks are facing continuing pressures on their business models from a number of sources, including the consequences of a low growth, low rates environment with ongoing private deleveraging; the impact of a new regulatory framework designed to fix the fault lines that caused the crisis; and the effect of determined progress on removing the implicit public subsidy of Too-Big-To-Fail.

He also admitted that some residual concerns about regulatory uncertainty may have been secondary reinforcements to the macroeconomic drivers of recent market turbulence.  

However, Carney remained adamant that "this is not 2008", adding:

"The largest cross-border banks are considerably stronger than during prior episodes of market stress. Common equity requirements are seven times the pre-crisis standard for most banks. Global standards require banks to hold much higher liquid asset buffers, to strengthen their trading books, and to reduce and simplify the formerly complex web of interbank exposures."