Jul 06
2
BIS Warns Central Bankers
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Ok so this week the Financial Times reported that the Bank of International Settlements (BIS) is concerned that central bankers have allowed low interest rates to last too long. The amasing thing is that this comes at a time when it seems that there is more money floating around in the system than ever before!
The BIS worries that central bankers worldwide kept interest rates too
low for too long, allowing asset prices to surge and global trade
imbalances to reach unprecedented levels. These potential mistakes were
compounded by central banks in Asia, particularly China, artificially
preventing exchange rates from appreciating.
low for too long, allowing asset prices to surge and global trade
imbalances to reach unprecedented levels. These potential mistakes were
compounded by central banks in Asia, particularly China, artificially
preventing exchange rates from appreciating.
The immediate consequence for advanced economies is rising
inflationary pressure now import prices are no longer falling. But the
nagging longer term threat is the unwinding of the huge trade
imbalances embodied in the US current account deficit and huge
surpluses in China, Japan, Germany and oil exporters.
inflationary pressure now import prices are no longer falling. But the
nagging longer term threat is the unwinding of the huge trade
imbalances embodied in the US current account deficit and huge
surpluses in China, Japan, Germany and oil exporters.
The report argued that “inflationary pressures might re-emerge with
a vengeance and/or that the unwinding of the financial imbalances could
undermine economic activity and contribute to unwelcome disinflation”.
a vengeance and/or that the unwinding of the financial imbalances could
undermine economic activity and contribute to unwelcome disinflation”.
It urged members to continue to tighten policy for now. “The
current phase of monetary tightening seems clearly justified,” it said,
but added that “the issue of how higher rates and financial imbalances
might interact needs careful consideration”.
current phase of monetary tightening seems clearly justified,” it said,
but added that “the issue of how higher rates and financial imbalances
might interact needs careful consideration”.
The BIS said the global imbalances could resolve themselves, but
warned “it is also easy to identify forces that might make various
processes of rebalancing less smooth. Some of these could imply the end
will be a ‘bang’ of market turbulence, others a ‘whimper’ of slow
growth for an extended period.”
warned “it is also easy to identify forces that might make various
processes of rebalancing less smooth. Some of these could imply the end
will be a ‘bang’ of market turbulence, others a ‘whimper’ of slow
growth for an extended period.”
It said central bankers should take more account of global forces
rather than domestic inflationary threats, take greater account of
financial imbalances, including rising asset prices, and judge
inflationary pressures over a much longer time horizon than the usual
two to three years.
rather than domestic inflationary threats, take greater account of
financial imbalances, including rising asset prices, and judge
inflationary pressures over a much longer time horizon than the usual
two to three years.