Central banks 'fumble in the dark' as they cut rates - BIS

    The Bank for International Settlements (BIS), the world's oldest international financial institution, launched a stinging critique of central banks, saying the use of ultra-low interest rates to boost economic growth is ineffective and counterproductive because it encourages further debt and eases the pressure on politicians to undertake necessary reforms.
    BIS, known as the central banks' bank, said exceptionally low interest rates, unbalanced global economic growth and high debt are symptomatic of the failure of the policy framework used by central banks and threatens to entrench financial instability and chronic economic weakness.
    "Persistent exceptionally low rates reflect the central banks' and market participants' response to the unusually weak post-crises recovery as they fumble in the dark in search of new certainties," said Claudio Borio, head of BIS' respected Monetary and Economic Department since late 2013.
    In its annual report, Swiss-based BIS argues that the current malaise in the global economy is largely a result of a failure by policymakers to grasp how financial developments, especially debt, interact with economic activity and inflation in a world with closely connected economies.
   "Rather than just reflecting the current weakness, low rates may in part have contributed to it by fueling costly financial booms and busts," said BIS, adding: "The result is too much debt, too little growth and excessively low interest rates. In short, low rates beget lower rates."
    BIS, a hub of global central bank cooperation, said central banks' obsession with controlling short-term economic output and inflation must be replaced by policies - both national and international - that rely less on demand management and more on structural policies so as to abandon the debt-fuelled growth model that has become a substitute for meaningful reforms.
    The recommendations by BIS are hardly new as they echo the message in last year's annual report. But what stands out this year is a much sharper and more coherent analysis of the failings of the prevailing economic paradigm.
    This is a tribute to Borio, one of the pioneers in developing the understanding of financial cycles who became known in the early 2000s for arguing that financial imbalances - gauged by looking at the level of credit and property prices -  can build up in an environment of low inflation.
    Before the financial crises, which BIS warned about repeatedly, central banks were narrowly focused on keeping inflation low and therefore turned a blind eye to the forces that led to the global financial crises in 2008.
    To their credit, many central banks have begun to incorporate financial instability into their policy frameworks, but BIS argues it has to be at the core of the debate over economic policy.
    Policymakers still remain focused on closing output gaps and use policies that affect demand to eliminate that gap to achieve full employment and stable inflation. Although financial instability is now recognized as something that has to be addressed, the current cure is largely through prudential policy that is separate from monetary policy.
    For BIS, financial cycles provides it with a lens through which it becomes easier to understand why economic growth remains to sluggish and unbalanced five years after the end of the global financial cries despite low or even negative real interest rates, and high or growing debt.

Lending to emerging markets rises in Q1 - BIS

    Lending to borrowers in emerging markets expanded by $84 billion in the first quarter of 2012 from the previous quarter while lending to residents in developed economies contracted by $12 billion, according to the Bank for International Settlements.

   Total international lending by major banks reporting to the BIS inched up by $59 billion, or 0.2 percent, to $30.7 trillion in outstanding claims, according to preliminary banking statistics.

    The largest increase in lending to borrowers in emerging markets came from credit to residents of China, which rose by $54 billion, BIS said.

BIS: Fix banks to break the vicious economic cycles

    The global economy is trapped in a maelstrom of vicious cycles and the best way to halt this downward spiral is to recapitalize banks so they no longer burden governments and can return to their role of supporting economic growth, the Bank for International Settlements (BIS) said.

    Major parts of the economy - households and firms, governments and banks – must improve their financial positions but they are stuck in vicious cycles: As households and firms cut debt, it hampers the recovery of governments and banks. As governments cut spending, it hurts households and banks, and as banks recognize losses, they have less money to lend.

    “Each sector’s burdens and efforts to adjust are worsening the position of the other two,” said BIS, known as the central bankers’ bank, in its annual report.