Report: Ultra-low interest rates could become entrenched

By David McHugh
AP Business Writer

FRANKFURT, Germany (AP) - Near-zero interest rates could become chronic in the world's major economies unless "a firm hand" is used to raise them back to more normal levels.

That is the message in the annual report issued Sunday from the Bank for International Settlements based in Basel, Switzerland. The BIS, which functions as a forum for global central banks, argues that low rates aimed at stimulating economic growth in the short term may actually do the opposite over longer periods.

It said cheap money encourages more debt and creates financial booms and busts that leave lasting scars on the economy - with the result that central banks apply more cheap money to try to lift the economy.

"Rather than just reflecting the current weakness, low rates may in part have contributed to it by fueling costly financial booms and busts," the BIS report said.

"The result is too much debt, too little growth and excessively low interest rates. In short, low rates beget lower rates."

Major central banks have kept low benchmark rates in place to stimulate the economy after the shock delivered by the global financial crisis of 2007-2009. The idea is that low rates make it easier for people to borrow, spend and invest.

Low rates have driven down mortgage rates, enabling homeowners to refinance, and they have helped boost stocks. But they have wiped out years of income for savers - and put pressure on insurance companies and pension funds.

The Fed is looking at whether to finally raise rates, but has held off because inflation remains low and growth in the United States still uncertain.

The BIS report didn't mention individual countries. It argued that inflation is an uncertain guide to whether the economy is strong enough to weather a rate increase. It also said that keeping rates so low for so long draws money into less productive areas of the economy. The BIS argued that "monetary policy normalization should be pursued with a firm and steady hand."

Published: Tue, Jun 30, 2015

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