During the current decade central banks have shouldered an increasing policy burden around the world in trying to dial reasonable economic while trying to counter disinflation bordering deflation too. This difficult decade in economic terms was born out the global financial crisis/ great recession at the close of the first decade of the 21st century reinforced since by government budget and debt crises in Europe, a great boom and collapse in industrial commodity prices and a rolling emerging market debt crisis currently. Adding to the extraordinary burden placed on central banks they have been working in some countries without any useful sharing of the burden by government. In many cases, effective government policy assistance has been feeble or non-existent marred by concern that government borrowing is already too high prohibiting freer government spending.

The heavy policy burden almost imposed upon central banks has forced some to go beyond the limits of conventional monetary policy (reducing policy interest rates towards zero) in to the strange world of negative interest rates. The European Central Bank, Swiss National Bank and Bank of Japan are all in this position. Even more central banks have had to at some time expand their balance sheets purchasing assets from banks to boost their liquidity in the hope that some will flow through to greater commercial bank lending and in turn boost economic growth. Besides the central banks with negative policy interest rates, the US Federal Reserve and the Bank of England have also at times expanded their balance sheets regularly buying assets from commercial banks.

All but one of these central banks, the US Fed, are still the world of holding or expanding unconventional monetary policy positions. The fact that approaching eight years after the break out of the global financial crisis the global economy is still growing only moderately with deflation still a potential threat has called some to question the effectiveness of monetary policy.

The question of policy effectiveness arose again late last week after the European Central Bank decided to lower all of its policy rates again including pushing its deposit rate another 10bps further in to negative territory, to -0.40%. The ECB also decided to boost its asset buying program by 20 billion euro a month to 80 billion euro and add eligible investment grade bonds of non-bank corporations to its purchases at the same time. This regular buying would continue through to March 2017 at least. The ECB also announced four new targeted longer-term repurchase operations as well.

These various initiatives all have the one basic aim trying to encourage banks to lend more at a lower interest rate. To some degree, the earlier initiatives of the ECB have been working and European bank lending has been rising, but nowhere near enough to foster European annual growth and inflation pushing above 2% as the ECB would like. In its latest economic growth and inflation forecasts the ECB still sees growth and inflation persistently lower than it would like over the next two years. Some regard these forecasts as an admission that the ECB has fallen “behind the curve” with its policy moves. While the criticism has an element of truth it is largely unfair. The ECB has been trying to boost economic activity while European Governments have effectively been doing the opposite, conducting austerity budgetary measures. Whatever the merits or otherwise of austerity budgets in Europe, it has forced the ECB to a position of extreme and unconventional monetary policy easing.

Whether unconventional monetary policy easing has been successful is perhaps not the greatest concern. Indeed moderate global economic growth against the odds speaks in favour of more success for monetary policy than it is given credit for. Greater concerns in our view are that some aspects of unconventional monetary policy easing present their own suite of problems. Negative interest rates combined with flat yield curves make it harder for banks to lend profitably. Measures taken to overcome this problem may gain traction but the future cost may be greater incidence of failure by companies induced to borrow at very low interest rates facing future higher interest rates on debt rollovers. In short, the seeds of a new corporate debt crisis down the track are being sown by current monetary policy measures.

The problem of monetary policy taking too much of the policy burden is not confined to those countries caught in the realm of unconventional monetary policy easing. In Australia, monetary policy is still in conventional territory with a cash rate of 2.00%. Yet at 2.00% and with the bank lending interest rates that cascade off that cash rate, albeit with shifting margins over time, low interest rates by Australian standards have undoubtedly been capitalized in to big house price gains in the two biggest cities adding significantly to the social problem of affordable housing. The RBA and APRA were forced to examine and introduce macro-prudential controls to address excessive growth in investment housing lending that if left unchecked might have destabilized the financial system.

There is clear evidence from the housing boom that Australian interest rates are too low, but there is also a risk that demand growth in Australia could falter seeming to require even lower interest rates. This inconsistency is largely a function of inadequate support for monetary policy from government policy. If the primary focus of budgetary policy remains medium to long-term reduction of government debt to the exclusion of short-term support for demand from government spending, the RBA will continue to be in a position where monetary policy has to be used to try and fine tune demand.

Much as is the case in the rest of the world, there is little sign that governments are prepared to shoulder more of the policy burden to help promote stronger growth. In a struggling growth world, central banks are virtually on their own trying to dial policies that stand some chance of improving growth prospects. While this situation continues, and it looks as if it may continue for a considerable time, central banks, including the RBA, have very little alternative but to keep policy interest rates very low – even though there will likely be risk that they may sow the seeds for future debt crises.