Treasury boss Martin Parkinson fears low global interest rates are making investors more keen to take on risk.
Financial markets seem more concerned about “missing out” on gains than making losses, he said in London.
Evidence of this risk appetite is reflected in limited reactions to recent, negative geopolitical events, Dr Parkinson said in a prepared speech to a Chatham House audience Thursday night.
These include the crisis in the Ukraine, events in Iraq and recent worries over the Portuguese banking system.
And this poses problems when it cames to easier monetary policy.
“On the one hand, ongoing accommodative monetary settings are likely to continue to stoke risk-taking behaviour,” Dr Parkinson said.
“On the other hand, premature withdrawal of stimulus may undermine the recovery and increase corporate default rates with obvious flow-on impacts to asset markets and the real economy.”
While monetary policy continued to play a supportive role in economies, it could only do so much.
It was supposed to stabilise an economy and help cement a recovery by encouraging businesses to invest and employ.
“Instead, we continue to see business investment – critical for strong and sustainable growth – remaining anaemic,” said the Reserve Bank of Australia board member.
That’s why the G20 finance ministers and central bank governors meeting in Sydney in February agreed to pursue reforms to lift world growth by two per cent over the current trajectory over the next five years.
These should aim to increase investment, lift employment and participation, enhance trade and promote competition.
“Adopting a business-as-usual approach to policy will not put growth back on a strong and sustainable path,” Dr Parkinson said.
The global financial crisis showed that complacency can be disastrous.
“We cannot waste this opportunity.”
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