BSS/AFP, Frankfurt Am Main :
The collapse of US investment giant Lehman Brothers 10 years ago forced central banks to take unprecedented steps to help rescue the global economy, thrusting them into uncharted territory they are still navigating.
Acting as firefighters-in-chief, central banks pushed the boundaries of their mandates by deploying a range of unusual tools that have, for better or worse, become the new normal.
“We underestimated the crucial role they would have to play in case of serious financial instability,” said Eric Dor, director of economic studies at France’s IESEG management school.
But after years of ultra-low interest rates and floods of cheap money, central bankers around the world are grappling with the next hurdle: how to ease out of crisis mode without jeopardising the recovery.
“This is an extremely big challenge,” said ING Diba bank analyst Carsten Brzeski.
The delicate balancing act has been complicated by “uncertainties” on the horizon, he added, as US President Donald Trump’s trade rows and growing geopolitical risks shade the economic outlook.
And although the US Federal Reserve, European Central Bank, Bank of England and Bank of Japan all sprung into action together in 2008, the road back to monetary policy normalisation is one each must walk on their own.
Central banks are generally tasked with lowering or raising interest rates to achieve price stability.
But when access to credit dried up after the Lehman collapse, they had to think outside the box.
First, they slashed interest rates to record-low and even negative levels.
Next, they flooded the financial system with cash.
They offered cheap loans to banks and began massively buying up government and corporate bonds in a stimulus scheme known as “quantitative easing” (QE), hoping to encourage lending and stimulate spending.
