World ill-equipped to defend itself from the next crash, warns BIS

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When the next financial crash arrives the world will be ill-equipped to fight its advance, the Bank of International Settlements has warned.

In its annual report, the trade body for global central banks warns the armoury of central banks has all but dried up as a result of their aggressive strategy of slashing interest rates to the bare minimum in a bid to stave off an economic meltdown.

The BIS argues that rather than just reflecting the current weakness, the loose monetary policy may in part have contributed to it by fuelling costly financial booms and busts and delaying adjustment.

Head of the BIS’s monetary and economic department Claudio Borio says: “The result is too much debt, too little growth and too low interest rates. In short, low rates beget lower rates.

“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.”

He adds that the global debt burdens and financial risks “are still too high”, that productivity growth is too low and room for manoeuvre in macroeconomic policy too limited.

“Despite the progress made, the global economy is still struggling to shake off completely the post-crisis malaise,” he adds.

According to the BIS the most visible symptom of this predicament is the persistence of ultra-low interest rates.

“Interest rates have been exceptionally low for an extraordinarily long time, against any benchmark. 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,” says Borio.