Picture: NZZ Konferenz, SIFF

Among the highlights of the conference was a panel on monetary policy, where Axel Weber, Chairman of UBS Group, Walter B. Kielholz, Chairman of the Board of Directors of Swiss Re, Michel M. Liès, Chairman of Zurich Insurance, and Adam Tooze, economic historian and professor at Columbia University, discussed the effects of the financial crisis ten years on and the current role of central banks.

The current slowdown in the economy is conjuring up fears of a real recession in 2020. Axel Weber highlighted three areas in which the economy is slowing. Firstly, in trade; a result of fallout from the trade tensions we have seen. Secondly, in investments as a result of the uncertainty created by Brexit which affects both in Europe as well as in America. And finally, in industrial production, again linked to the trade dispute between China and the United States. However, the potential for an economic recovery going forward is equally high: “If some of these disputes get resolved, some of these dark cloud will disappear and the economy will pick up momentum,” Weber explained.

Waiting for a recession

For Walter B. Kielholz, the greatest danger at the moment is not linked to political uncertainties, but rather that there could be no recession at all. In his view, recessions are a necessary element in the cyclical development of an economy. They lead to a reduction of debt, correct the misallocation of capital and result in a restructuring of the economy. The effort to avoid a recession at any cost has had serious consequences and will lead to a harsher correction once the recession actually sets in.

Rethinking monetary policy

Axel A. Weber agrees, criticizing that “there has been a failure to implement fiscal and political reforms over the past ten years. Instead, monetary policy has been the main leaver which has been manipulated.” According to him, monetary policy, that includes an interest rate reduction is a lot less effective when rates reduced into the negative and have far more negative side effects than when they are reduced in the positive sphere. Because of this, Weber stated that he was cautious about whether the latest round of negative interest rate moves were productive in the sense of achieving the objective of central banks. Given the huge uncertainty in the global economy, they may not be the best policy choice.

The future of central banking

Looking beyond monetary policy, Adam Tooze emphasized that central banks should have a higher responsibility in mitigating climate change. According to him, the active involvement of financial institutions is crucial in the fight against climate change. Given the urgency of the problem and the fact that this is “not about saving a few polar bears, but rather the whole system,” central banks ought to realize their role in solving this historic challenge. Ultimately, Tooze argues, the current situation even legitimizes giving up on the principle of neutrality by which central banks currently abide.

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