By: Dr. Mike Campbell

The Bank for International Settlements (BIS) is the world’s oldest international financial institution and was established in 1930. It serves as the central banker’s bank and aims to foster international monetary and financial cooperation.

The BIS recently called for an end to the period of low interest rates that many central banks are currently offering. The central banks dropped interest rates from typical levels to record low values in an attempt to stimulate their economies at the height of the global financial crisis. A couple of years down the line from the worst of that storm and the majority of these central banks are still at or near to these historically low interest rates. The reason for this is that the recovery phase in the current economic cycle has been much slower than is typical and has been perceived (nearly universally) as being “fragile”.

The idea behind the “cheap money” policy is that it will enable businesses to borrow money to fuel expansion and that this will force the economic cycle firmly into growth. However, BIS points to a downside to this policy. In some regions, notably areas in the developing world where the global financial crisis wasn’t so keenly felt as in larger economies with better developed financial sectors, cheap money is being used to fuel property speculation. In many regions, inflation is on the rise (notably fuel, commodity and food price inflation) and central banks are being denied the use of higher interest rates as a tool to combat inflation. BIS cautions that asset bubbles could leave developing economies with big problems. It needs to be recalled that it was the issue of sub-prime loans that caused the global financial crisis to start in the major (western) economies in the first place.