Update: Reliance on near-zero interest rates may trigger financial crisis

A repeat of the 2008 financial crisis, as we have been warning, is possible if governments continue to rely on near-zero interest rates rather than develop sustainable growth and overhaul corporate taxes and subsidies, says The Bank for International Settlements (BIS) in its annual report. It referred to a 'risky trinity' of low productivity, high global debt and diminished room to manoeuvre by central banks and suggested that officials needed to act quickly.

The Bank for International Settlements has warned that governments need to abandon debt-fuelled growth and shift to more sustainable expansion plans as a “risky trinity” of low productivity, high debt and lack of central bank firepower stalks the global economy.

In its annual report, the BIS – which is known as the central bank of central banks – said a repeat of the 2008 financial crash was possible unless the growing reliance on near-zero interest rates to keep the global economy afloat was eased by ministers stepping in to shoulder greater responsibility.

It said unwarranted gloom about growth in the global economy, which it argued had returned to historical averages, was preventing governments from pressing ahead with reforms.



The warning echoes reports by the International Monetary Fund (IMF) and the Organisation for Cooperation & Development (OECD). They have chided governments for doing little more than impose austerity to balance their budgets while refraining from making strategic decisions to develop more sustainable growth.

“We need policies that we will not once again regret when the future becomes today,” the BIS said in a 258-page examination of global economic trends and the health of the financial services industry.

It warned that ministers needed to act quickly as the post-crash recovery began to run out of steam with commodity prices falling, the dollar strengthening and global liquidity starting to tighten.



The BIS chief, Claudio Borio, said: “There are worrying developments, a sort of ‘risky trinity’, that bear watching: productivity growth that is unusually low, casting a shadow over future improvements in living standards; global debt levels that are historically high, raising financial stability risks; and room for policy manoeuvre that is remarkably narrow, leaving the global economy highly exposed.”

He argued that while growth across developing and developed world economies had failed to recapture its previous rapid pace, it still remained robust and offered governments scope to tackle long-term issues.

An overhaul of corporate taxes and subsidies was needed “to remove the bias towards debt accumulation, for example by eliminating the tax advantage of debt over equity,” he added.

A longstanding emphasis on fighting inflation by central banks was also part of the problem when the main issue was growth and jobs.

Hyun Song Shin, the BIS’s head of research, said: “There is an implicit assumption that inflation at 2% is the best measure of slack in the economy, and that the economy gets sucked into a downward spiral when inflation hits zero. But this may not be the right inference. We should be looking at growth and looking at employment, too.”