Raising the red flag over interest rates remaining “extraordinarily low” globally, banking regulators’ body Bank for International Settlements Sunday said easy monetary regimes are resulting in a build-up of financial vulnerabilities.
The observation of the BIS comes against the backdrop of concerns that sudden reversal in relaxed monetary policies of advanced economies could have a significant fallout on emerging markets, including India, which have been witnessing higher foreign capital inflows, PTI reported.
In its annual report released Sunday, BIS said globally, interest rates have been extraordinarily low for an exceptionally long time, in nominal and inflation-adjusted terms, against any benchmark.
“Such low rates are the most remarkable symptom of a broader malaise in the global economy: the economic expansion is unbalanced, debt burden and financial risks are still too high, productivity growth too low, and the room for maneuvering in macroeconomic policy too limited.
“The unthinkable risks are becoming routine and being perceived as the new normal,” it said.
According to BIS, this malaise also reflects the failure to come to grips with financial booms and busts that leave deep and enduring economic scars.
“Domestic policy regimes have been too narrowly concerned with stabilizing short-term output and inflation and have lost sight of slower-moving but more costly financial booms and busts.
“And the international monetary and financial system has spread easy monetary and financial conditions in the core economies to other economies through exchange rate and capital flow pressures, furthering the build-up of financial vulnerabilities,” BIS said.
Recently, Reserve Bank of India Governor Raghuram Rajan had cautioned against competitive monetary policy easing by central banks.
Structural Policies
Meanwhile, BIS said there should be increased reliance on structural policies rather than demand management policies.
Such an approach would help “abandon the debt-fuelled growth model that has acted as a political and social substitute for productivity-enhancing reforms”, it added.
Claudio Borio, Head of the Monetary and Economic Department, BIS, said persistent exceptionally low rates reflect central banks’ and market participants’ response to the unusually weak post-crisis recovery.
“The rates are a vivid reminder of the extent to which monetary policy has been overburdened in an attempt to reinvigorate growth...in longer term, they risk weakening the financial sector and economic activity, by hindering rational investment decisions and entrenching debt dependence,” he said.
To address the deficiencies in the global financial system, BIS has suggested a three-pronged strategy that includes moving away “from illusory short-term macroeconomic fine-tuning towards medium-term strategies”.
There is a need to shift from overwhelming attention on near-term output and inflation towards a more systematic response to slower moving financial cycles, it noted.
Furthermore, BIS said the focus should move away from “a narrow own-house-in-order doctrine to one that recognises the costly interplay of domestic-focused policies”.
The BIS report–for April 2014 to March 2015–said central banks outside the major advanced economies were left to factor these very accommodative, but increasingly divergent, monetary policies into their own policy decisions.
