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BIS Warns Central Banks Of Next Global Financial Crisis

bank of international settlements (BIS)The Bank of International Settlements (BIS), which is supposed to be the central bank of all central banks, warned that the world will only have to helplessly watch as it hurtles towards the next global crisis. Its annual report, a harsh critique of international financial policies, states that central banks, which have been continuously cutting interest rates to boost their economies, are now trapped.

The low rates of interest led to a boom in economy, as they encouraged entrepreneurs to take excessive risks. These booms encouraged policy makers to cut the interest rates further.

Claudio Borio, the head of BIS’s economic and monetary department, stated:

Persistent exceptionally low rates reflect the central banks’ and market participants’ response to the unusually weak post-crisis recovery as they fumble in the dark in search of new certainties.

Rather than just reflecting the current weakness, they 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.

The BIS says that central banks are in no position to battle the next global economic crisis because the rates have been low for a long time. It states:

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

Since the interest rates in EU member states such as Switzerland, Denmark, and Sweden have fallen below zero, bond yields have declined.

BIS General Manager Jaime Caruana says:

There may be secular forces that put downward pressure on equilibrium interest rates, but we argue that the current configuration of low rates is neither inevitable, nor does it represent a new equilibrium.

The BIS says that the economies that have suffered the most in the previous global crisis are now facing the adverse effects of continuous low rates, which could seriously damage banks, making them unable to lend anymore. Low rates have also affected the growth of productivity as dependence on debt has increased.

The problem is made worse as people age throughout the world, making it difficult for them to pay off debts. In spite of this, policymakers depend on temporary economic boosts created by debts.

Giving the example of Greece, the BIS said that the country’s financial turmoil depicted the consequences of utilizing public and private debt as solutions to financial problems instead of making the required structural reforms.