BIS warns low rates may create 'financial distortions'

[Gerald]

The Bank for International Settlements (BIS) has warned that low interest rates across the globe are a threat to world financial stability.

The BIS warned low cost of borrowing had resulted in a credit and property price boom that was fuelling inflation, especially in emerging economies.

Central banks across the globe have cut interest rates in an attempt to boost growth after the 2008 financial crisis.

However, BIS warned that the policy may prove to be counterproductive.

"The prolonged period of very low interest rates entails the risk of creating serious financial distortions, misallocations of resources and delay in the necessary deleveraging in those advanced countries most affected by the crisis," the bank said in its annual report.
'Inflation fighting credibility'

While lose monetary policies and availability of easy credit have triggered growth, there has been a flip side to it as well.

Emerging economies, especially in Asia, have had to deal with rising prices for food and other essential commodities.

This has pushed up the cost of living and has threatened to derail growth in many developing nations.

The BIS warned that the central banks needed to change their policies in order to deal with the situation.

"Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks," it said.

"It is also crucial if central banks are to preserve their hard-won inflation fighting credibility," the bank added.

http://www.bbc.co.uk/news/business-13922857


Note: 27 June 2011 Last updated at 02:17 GMT