Very loose monetary policy runs the risk of causing credit bubbles that could throw us all back into financial crisis, the International Monetary Fund has warned us in no uncertain terms.
No bubble appears to have emerged yet, but we have had six years of low rates and despite the degree of caution exercised by investors, there are signals they are becoming restless.
If a bubble were to pop, the goal of returning to more normal monetary policy will be harder.
But loose money and low rates are still the rage, with Japan being the most recent nation to move aggressively to free up liquidity.
The deliberately enforced decline of the yen through vast bond buying should help the country’s exporters regain competitiveness, but it also has raised the price it has to pay to import much needed foreign oil and gas.
The reaction to Japan’s monetary easing has been generally positive, but a host of caveats have been raised. For sustained growth to develop, it needs to be backed up with supply-side reform to aid Japan’s manufacturers, labour market reforms and incentives to spur its ageing population to spend more.
Political will is necessary here. Low rates certainly prompts businesses thinking about boosting investment, but a climate of dampening global growth, anxiety over the EU, and counterproductive political brinkmanship over the US’ fiscal position, you wouldn’t be blamed for holding off spending
And that’s the rub. Spending the money wisely and not rushing into assets or projects that really could cause a bubble is what is needed. Businesses, plenty of which are sitting on piles of cash, seem reluctant to make the charge.