This week, the Bank of International Settlements (BIS) released its
annual report, warning that many monetary policymakers are ill equipped to fight the next global financial crisis, with global interest rates at record lows. Only days later, Sweden announced that it is lowering its main policy rate to below zero amid concerns over Greece, among other factors, prompting one economist to suggest that Sweden was “fighting gravity”. These slashed rates have fuelled a cycle of boom and bust across the globe, leaving many countries with little room to breathe.
Plummeting rates in Europe
Peter Spence, Economics Correspondent for the
Telegraph, reveals more about the report’s “scathing critique of global monetary policy”. He supports the BIS’s view that central banks have “backed themselves into a corner” by repeatedly cutting interest rates in a bid to boost economies.
“These low interest rates have in turn fuelled economic booms, encouraging excessive risk taking,” he writes. “Booms have then turned to busts, which policymakers have responded to with even lower rates.”
Spence considers the situation in Europe, focusing on policymakers in the eurozone, Denmark, Sweden and Switzerland, which have taken all taken interest rates below zero in a bid to boost prosperity. The result, however, has been a decline of bond yields into negative territory – which Jaime Caruana, General Manager of the BIS, cites as the most unusual development of the last year.
“Policymakers must now focus on the supply side of the economy, introducing the right reforms, rather than continue to lean on debt which will inevitably undermine growth,” Spence adds.
Telegraph article Structural reform is the only real thing that can dig us out of the low interest rates-low growth nexus
Drowning down under
Examining what the report’s findings might mean for the Australian economy, a comment piece in this week’s
Australian Financial Review asks whether “the unthinkable” is now becoming routine.
Instead of encouraging business investment and bringing Australia into a “golden age”, lowered interest rates have created a “world of low returns”. This new world has forced businesses to put new projects through “ever-higher hurdle rates” before they can consider backing them, the
Australian Financial Review adds.
“What is very clear, is that structural reform for increasing productivity is the only real thing that can dig us out of the low interest rates-low growth nexus,” the article concludes. “And near-zero interest rates are doing little to achieve this, while simultaneously leaving nothing in the policy tank for a future crisis.”
Australian Financial Review piece
Eastern promises
Meanwhile, the
Economic Times considers the report’s findings in relation to Asian economies. It notes that central banks outside the major advanced economies have been influenced by “increasingly divergent monetary policies”.
However, while the report highlights central bank policy easing in China and India, it also shows that interest rates were still close to recent historical norms, the
Economic Times added.
“The easing in India came against the backdrop of a deceleration of inflation from a high single-digit pace, strong economic growth, and an improved fiscal situation,” the report explains. “The authorities in India also announced a new monetary policy framework agreement, with a 4% target for consumer price inflation from early 2016 onwards.”
Economic Times coverage
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