Bank for International Settlements (BIS) general manager Jaime Caruana talks to Reuters during an interview at their headquarters in Basel June 25, 2013. The BIS criticized rate cuts and suggested they’ve contributed to an ongoing economic malaise.© Ruben Sprich / Reuters/Reuters
The Bank for International Settlements has fired a new broadside against "exceptionally easy" monetary policies that it blames for worsening financial distortions, jacking up debt and making it tougher for the global economy to get back on a track of sustainable growth.
"For some time now, policies have proved ineffective in preventing the build-up and collapse of hugely damaging financial imbalances, whether in advanced or in emerging market economies," the BIS says in its annual report, released Sunday.
"These have left long lasting scars in the economic tissue, as they have sapped productivity and misallocated real resources across sectors and over time."
Low rates do not merely reflect the current economic malaise, the BIS argues. They "may in part have contributed to it by fuelling costly financial booms and busts. The result is too much debt, too little growth and excessively low interest rates. In short, low rates beget lower rates."
Rates "have been exceptionally low for an extraordinarily long time, against any benchmark," Claudio Borio, head of the monetary and economic department, told reporters from the bank's headquarters in Basel, Switzerland.
"Moreover, the negative bond yields that have prevailed in some sovereign bond markets are simply unprecedented and have stretched the boundaries of the unthinkable. The recent market gyrations have not fundamentally altered the picture."
The BIS underscores the threat this poses for the global economy.
"Rather than promoting sustainable and balanced global growth, the system risks undermining it," Mr. Borio said in prepared remarks. "It has spread exceptionally easy monetary and financial conditions to countries that did not need them, exacerbating vulnerabilities there."
Surveying policies in several countries, the BIS report observed that central banks in Canada, Norway and Australia responded to weaker resource prices with interest rate cuts from already low levels. That's despite the fact core inflation remained near official targets and falling commodity prices "have not yet dented the financial booms" in the three countries.
The central banks' central bank, as the 85-year-old BIS is known, has long worried about the longer term dangers posed by massive monetary stimulus and other extraordinary measures adopted to combat the financial crisis of 2008-09 and still largely in place across a large swath of the world. In this, the bank resembles nothing so much as a frazzled parent nagging the kids to clean up their mess. And it has met with a similar lack of success.
Critics accuse the BIS watchdogs of espousing views that have little to do with economic or financial realities. The policy-makers actually responsible for navigating a course through treacherous waters have not only not been on the same page. They haven't even been reading the same book.
The latest salvo by the BIS, whose membership consists of 60 central banks and monetary authorities, comes a year after a harsh critique in which it urged policy-makers not to make the mistake of raising rates "too slowly and too late."
At the time, the BIS scolded Canada, Australia, Sweden and other "small advanced economies" for sticking to ultra-low rates too long. This prompted a surge in credit growth relative to gross domestic product that far exceeded historic standards, paving the way for widespread pain once the central banks inevitably launch a new tightening cycle.
But in the past year, central banks in Europe, Japan, China, Canada and elsewhere have opted for more easing in response to darkening economic clouds. The U.S. Federal Reserve has taken its foot off the gas pedal but has shown a reluctance to step on the brakes in the face of conflicting economic signals and persistently low inflation.
In its latest report, the BIS notes that the global economy has resumed growing at a level close to the historical average and suggests that lower oil prices should provide an additional boost in the near term.
But it adds this warning: "Debt burdens and financial risks are still too high, productivity growth too low and room for manoeuvre in macroeconomic policy too limited."