Global economy may be set for a downfall, according to BIS

The Bank of International Settlements (BIS) has put out a warning for global financial markets, as governments run out of monetary policy options, according to its latest quarterly report.

In two separate notes, BIS economists highlighted the fragile global economic backdrop, and said negative interest rates could become a reality for many more countries, as central banks look for ways to encourage real growth and battle falling oil prices [1].

BIS Chief, Claudio Borio, said the “uneasy calm” of previous months had given way to turbulence and a “gathering storm” [2].

Markets are expecting the European Central Bank (ECB) to push its deposit rate further into negative territory, lowering it 10 basis points to -0.4% to help ward off the threat of deflation [3].

Policymakers view negative rates as part of a strategy to raise inflation, although this is attracting criticism from other central banks, who say they are engaging in deliberate and short-sighted attempts to weaken currencies.

A multi-tier system introducing negative interest rates was implemented by Japan on 16 February, following in the footsteps of other countries, such as Switzerland, Sweden and Denmark.

The report cautioned that it was difficult to predict how individuals or financial institutions would behave if rates were to fall further below zero, or stay negative for a long period of time [3].

The BIS also said it was unknown as to how borrowers and savers would react, or whether the channels through which central banks’ rate moves are usually passed on to the broader economy, would “continue to operate as in the past” [3].

The ECB are due to meet on 10 March to discuss the implications of all central banks’ movements and intentions in the coming months.

[1] Business Insider. ‘There’s a gathering storm in the global economy and central banks are running out of options’.
[2] The Guardian. ‘Gathering storm for global economy as markets lose faith’.
[3] Financial Times. ‘Bank for International Settlements warns of negative rates risk’.