Geneva, June 28
The Bank of International Settlements (BIS) warned today that persistently low interest rates were symptoms of a malaise in the global economy that could end in entrenched instability.
The Basel-based institution, considered the central bank for central banks, hailed that plunging oil prices had boosted the global economy over the past year.
But it cautioned that global debt burdens and financial risks remained too high, while productivity and financial growth were too low, leaving policy makers with little room to manoeuvre.
“In the long term, this runs the risk of entrenching instability and chronic weakness,” the report said.
Claudio Borio, the head of the BIS monetary and economic department, said the ‘most visible symptom of this predicament is the persistence of ultra-low interest rates’. “Interest rates have been exceptionally low for an extraordinarily long time,” he said, warning that previously ‘unthinkable’ monetary policies were being so widely used they risked becoming the new norm. A number of countries, including Switzerland, Denmark and Sweden, have in recent months introduced negative rates, meaning investors have to pay to lend money to these states.
Between December 2014 and the end of May, around $2 trillion in global long-term sovereign debt, much of it issued by euro area sovereigns, was trading at negative yields, BIS said.
Key interest rates are lower now than at the height of the financial crisis that began in 2007, it added. “Such yields are unprecedented,” said the report.
The current low rates ‘are a vivid reminder of the extent to which monetary policy has been overburdened in an attempt to reinvigorate growth’, Borio said.
“They have underpinned the contrast between high risk-taking in financial markets, where it can be harmful, and subdued risk-taking in the real economy, where additional investment is badly needed,” he said.
Borio warned that the low rates do not just reflect the current weakness in the global economy, but ‘may in part have contributed to it by fuelling costly financial booms and busts and delaying adjustment’. “The result is too much debt, too little growth and too low interest rates,” he said, stressing that ‘low rates beget lower rates’. In the long term, these low rates ‘risk weakening the financial sector and economic activity, by hindering rational investment decisions and entrenching debt dependence’, he warned.
If countries want to truly strengthen the global economy and bring about sustainable growth, they will need to stop narrowly focusing on stabilising short-term output and inflation and concentrate more broadly on longer-term, and in the end far more costly financial booms and busts.
“The aim would be to replace the debt-fuelled growth model that has acted as a political and social substitute for productivity-enhancing reforms,” Borio said.
“Monetary policy has been overburdened for far too long. It must be part of the answer but it cannot be the whole answer,” he insisted.