Low interest rates and high debt could trigger crisis warns BIS

A cocktail of low interest rates and high debt are creating the conditions for another financial crisis, says the Bank for International Settlements.
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01.Low interest rates risky

A house sits on top of a calculator

The international peak body for central banks, the Bank for International Settlements (BIS), has warned that historically low interest rates could trigger another financial crisis. 

While the global economy has seen encouraging signs of growth over the past year, the BIS said in its annual report, that growth in advanced economies remains below pre-crisis averages.

The report said that a number of countries less affected by the crisis now “find themselves in the late stages of strong financial boom, making them vulnerable to a balance sheet recession and, in some cases, serious financial distress”.

Jaime Caruana, general manager of the BIS, said that ultra-low interest rates are promoting debt accumulation and risk-taking behaviour. 

Part of the problem, as the report highlights is that debt levels are still too high, with private debt, outside of the financial sector having risen 30 per cent since the crisis. 

“As debt increases, the ability of borrowers to repay becomes progressively more sensitive to drops in income and to interest rate rises. Thus, higher debt translates into greater financial fragility and financial cycles that may become increasingly disruptive,” said Caruana.

While monetary policy so far has been accommodating with low interest rates, the issue of when to start raising rates was brought centre stage in the report. 

“Navigating the transition is likely to be complex and bumpy … and the risk of normalising too late and too gradually should not be underestimated,” the report reads.

Given the recent upswing in the global economy, the BIS report says there is “a precious window of opportunity that should not be wasted” to start normalising monetary policy and bring interest rates back to normal levels. 



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