This week’s chart of the week comes from the 85th annual report of the Bank for International Settlements (BIS), an institution which acts as a central bank for the central banks.
In the report, the BIS wades into the debate about the ‘exceptional situation’ in which global interest rates find themselves. You may be familiar with the data, but the observations made by the BIS are worth repeating:
– Interest rates have never been so low for so long both in nominal and real (inflation-adjusted terms). The low level of bond yields is without precedent.
– Policy rates are even lower than at the peak of the Great Financial Crisis in both nominal and real terms.
– In real terms, interest rates have now been negative for even longer than during the Great Inflation of the 1970s.
– The situation is exceptional, but no end seems to be in sight. “There is something deeply troubling” says the BIS, “when the unthinkable threatens to become routine.”
The BIS goes on to opine that monetary policy has
(i) taken on far too much of the burden of boosting output
(ii) been ineffective in preventing the build-up and collapse of hugely damaging financial imbalances which in turn have damaged economies by sapping production and causing a misallocation of resources across sectors and time.
The fact that ultra-low interest rates have prevailed for so long does not, in the opinion of the BIS, necessarily mean that they are equilibrium ones, conducive to sustainable and balanced global expansion.
In other words, the BIS does not buy the so-called ‘secular stagnation‘ theory. Rather than being a function of current economic weakness, the BIS believes that low rates may in part have contributed to it by fuelling costly financial booms and busts. The result is a spiral of too much debt, too little growth and excessively low interest rates. In short, says the BIS, “low rates beget low rates.”
The BIS therefore recommends central banks to attach more weight than they have been doing to the risks of normalising (monetary policy) too late and too gradually. According to the BIS, governments should be doing more to implement structural reforms instead of leaving responsibility for steering the global recovery to monetary authorities.