Low rates of interest hurting growth: BIS

THE very low interest rates that have prevailed for so long are not conducive to sustainable and balanced global expansion, the Bank of International Settlements (BIS) said yesterday.

Mr Claudio Borio, head of the bank's monetary and economic department, said: "Rather than just reflecting the current weak global economy, (ultra-low interest rates) may in part have contributed to it by fuelling costly financial booms and busts and delaying adjustment."

The BIS has 60 member central banks representing countries from around the world.

Its head office is in Basel, Switzerland.

The persistent and exceptionally low interest rates indicate an unusually weak post-crisis recovery as central banks and market participants "fumble in the dark in search of new certainties" and attempt to reinvigorate growth, said Mr Borio, who was speaking during a media teleconference about the bank's annual report, released yesterday.

This has resulted in high risk-taking in financial markets, which can be harmful, and subdued risk-taking in the real economy, where additional investment is badly needed.

For instance, the low interest rates have weakened the financial strength of insurance companies and pension funds by encouraging an aggressive search for yield, partly channelled through a burgeoning asset management industry.

In the longer term, ultra-low interest rates risk weakening the financial sector and economic activity by hindering rational investment decisions and entrenching debt dependence, Mr Borio added.

An essential element for promoting robust and sustainable global growth in the long term will be to rely less on demand management policies and more on structural ones, the report said.

The aim would be to "abandon the debt-fuelled growth model that has acted as a political and social substitute for productivity-enhancing reforms".

CHIA YAN MIN

A version of this article appeared in the print edition of The Straits Times on June 29, 2015, with the headline 'Low rates of interest hurting growth: BIS'. Print Edition | Subscribe