Tighter monetary policy is required on the global stage to alleviate risks to financial stability, the Bank for International Settlements has warned.
In its annual report, the international financial cooperation organisation examines a number of “daunting challenges” facing policymakers and highlight the risks these create for the financial system.
The group notes the growing size and complexity of central bank balance sheets, which is a result of “unconventional” monetary policies, and claims this could damage the credibility of future monetary policy if left unchecked.
In addition, the bank says that the high headline inflation rates caused by rocketing commodity prices suggest the need for interest rate increases. This has to be balanced against the weakness in the financial sector and the impact of balance sheet adjustment in both the public and private sectors in some economies, but the BIS argues that rises are needed nonetheless.
“The prolonged period of very low interest rates entails the risk of creating serious financial distortions, misallocations of resources and delay in the necessary deleveraging in those advanced countries most affected by the crisis,” the bank explains.
The BIS adds that central banks may have to consider increasing interest rates at a faster pace than they have when tightening policy previously.