Bank for International Settlements warns that low rates risk backlash as effects spill over into the real economy
By Szu Ping Chan
11:00AM GMT 18 Mar 2015
The BIS warned that the low rate environment could result in a backlash from ordinary people whose savings were being eroded away Photo: AFP
Low inflation, bond yields and interest rates around the world will push the boundaries of economic and political stability to breaking point if they continue on their downward trajectory, the Bank for International Settlements has warned.
The Swiss-based "bank of central banks" said the "sinking trend" of global rates would push countries further into uncharted territory.
It highlighted that $2.4 trillion (£1.6 trillion) of long-term global sovereign debt was now trading at negative yields, with an increasing number of investors willing to pay governments for the privilege of lending to them.
"As bond markets show us day after day, the boundaries of the unthinkable are exceptionally elastic," said Claudio Borio, head of the Monetary and Economic department at the BIS.
"The consequences should be watched closely, as the repercussions are bound to be significant."
The BIS warned that the low rate environment, which has already led to gaping pension deficits and lower bank profits, could risk a backlash from ordinary people whose savings were being eroded away.
It said 20 central banks had eased monetary policy over the past three months alone. Mr Borio noted that the low rate environment had become so acute that even the International Monetary Fund had set a floor on its special drawing rights - which serves as the IMF's own form of international currency.
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"In such a world, easing begets easing," he said. "If this unprecedented journey continues, technical, economic, legal and even political boundaries may well be tested."
Banks have been reluctant to pass on negative rates to retail depositors for fear of losing customers - even though it hurts their profit. JP Morgan said in February that it would start to charge large institutional clients to park their money at the bank.
While low UK inflation, which stood at just 0.3pc in January, is expected to be temporary, Mark Carney, the governor of the Bank of England, said in a recent speech that interest rates could stay at a record low of 0.5pc for longer if the pound pushed inflation down further.
Minouche Shafik, the Bank's deputy governor for banking and markets, outlined the risks of moving rates into negative territory in its most recent Inflation Report, and said that policymakers were watching developments in other countries closely.
She said there was a risk that people and businesses could "revert to cash. [There is] also the worry about what happens to money markets when rates are negative," she said.
Martin Weale, an external member of the Bank's Monetary Policy Committee that sets interest rates, said the bank contemplated using negative rates at the height of the eurozone debt crisis but decided against such a move because it would have signalled "a change in the nature of money as we know it". He said companies may have decided to hold money in secure warehouses instead of at the Bank if rates had been cut to below zero.
However, Mr Carney has said capital rebuilding by banks has since reduced some of the risks associated with negative rates.
A separate paper co-authored by Mr Borio argued that periods of deflation has less economic costs than sustained falls in property prices. Its analysis of 38 economies over a period of more than 100 years showed economies grew by an average of 3.2pc during deflationary periods, compared with 2.7pc when prices were rising.
It said drawing blind comparisons with the 1930s were misguided. "The historical evidence suggests that the Great Depression was the exception rather than the rule," said Hyun Shin, head of research at the BIS.
It said 20 central banks had eased monetary policy over the past three months alone. Mr Borio noted that the low rate environment had become so acute that even the International Monetary Fund had set a floor on its special drawing rights - which serves as the IMF's own form of international currency.
Mapped: How central banks lost control of the world
"In such a world, easing begets easing," he said. "If this unprecedented journey continues, technical, economic, legal and even political boundaries may well be tested."
Banks have been reluctant to pass on negative rates to retail depositors for fear of losing customers - even though it hurts their profit. JP Morgan said in February that it would start to charge large institutional clients to park their money at the bank.
While low UK inflation, which stood at just 0.3pc in January, is expected to be temporary, Mark Carney, the governor of the Bank of England, said in a recent speech that interest rates could stay at a record low of 0.5pc for longer if the pound pushed inflation down further.
Minouche Shafik, the Bank's deputy governor for banking and markets, outlined the risks of moving rates into negative territory in its most recent Inflation Report, and said that policymakers were watching developments in other countries closely.
She said there was a risk that people and businesses could "revert to cash. [There is] also the worry about what happens to money markets when rates are negative," she said.
Martin Weale, an external member of the Bank's Monetary Policy Committee that sets interest rates, said the bank contemplated using negative rates at the height of the eurozone debt crisis but decided against such a move because it would have signalled "a change in the nature of money as we know it". He said companies may have decided to hold money in secure warehouses instead of at the Bank if rates had been cut to below zero.
However, Mr Carney has said capital rebuilding by banks has since reduced some of the risks associated with negative rates.
A separate paper co-authored by Mr Borio argued that periods of deflation has less economic costs than sustained falls in property prices. Its analysis of 38 economies over a period of more than 100 years showed economies grew by an average of 3.2pc during deflationary periods, compared with 2.7pc when prices were rising.
It said drawing blind comparisons with the 1930s were misguided. "The historical evidence suggests that the Great Depression was the exception rather than the rule," said Hyun Shin, head of research at the BIS.
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