Warning of risk to financial stability

Bank for International Settlements comes out in very strong language

GLOBAL interest rates were too low and posed a rapidly growing risk to financial stability and economic growth, the Bank for International Settlements (BIS) said yesterday.

In its strongest warning yet that policy normalisation should come sooner rather than later, the central bankers’ central bank said economic growth across the world was uneven, debt burdens in many areas are high and rising, and the explosion of credit growth shows financial imbalances were building up again.

The Switzerland-based BIS said a major contributory factor had been the pursuit of “excessively low” interest rates in response to the 2007-08 global financial crisis and the deflation scare triggered by last year’s plunge in global oil prices.

But keeping rates anchored at these historic, ultra-low levels threatened to inflict “serious damage” on the financial system and exacerbate market volatility, as well as limiting policymakers’ response to the next recession when it came.

“Risk-taking in financial markets has gone on for too long. And the illusion that markets will remain liquid under stress has been too pervasive,” the BIS said in its 85th annual report.

“The likelihood of turbulence will increase further if current extraordinary conditions are spun out.

“The more one stretches an elastic band, the more violently it snaps back.”

Summed up state

Claudio Borio, the head of the BIS’s Monetary and Economic Department, summed up the state of the global economy and financial system as one of “too much debt, too little growth and too low interest rates”.

The first US interest rate hike in almost a decade is now on the horizon and when the Federal Reserve does move, it will mark a turn in the global monetary policy tide.

No fewer than 29 central banks have eased policy to some degree this year to boost growth, ward off the threat of deflation, or both.

The most notable of these has been the European Central Bank’s 1.1 trillion ( R15 trillion) “quantitative easing” programme of bond buying, launched in March and due to run until September next year.

In strong language for the usually reserved BIS, it said extraordinarily loose monetary policy on a global level couldcause “pervasive mispricing” in asset markets.

It said that stocks and some corporate bond markets were now “quite stretched”.

“In some jurisdictions, monetary policy is already testing its outer limits, to the point of stretching the boundaries of the unthinkable,” the BIS said.

A return to more normal policies would be “bumpy”, not least because low rates had given rise to a “faulty debtfuelled global growth model” – precisely what caused the crisis in the first place.

Central banks had carried the burden of ensuring the post-crisis recovery for too long, BIS said. – Reuters