THE WORLD is still hooked on cheap debt, and its addiction to ultra-low interest rates could undermine the global recovery, the Bank of International Settlements (BIS) warned yesterday.
The group of central bankers fears sustained low rates are promoting debt when the world should be weaning itself off credit-fuelled growth.
And the continued obsession with borrowing also means the hike in interest rates, when it eventually comes, could damage growth and confidence.
“If they persist too long, ultra-low rates could validate and entrench a highly undesirable type of equilibrium – one of high debt, low interest rates and anaemic growth,” said BIS’s Jaime Caruana.
And BIS’ annual report warned: “Countries could at some point find themselves in a debt trap: seeking to stimulate the economy through low interest rates encourages even more debt, ultimately adding to the problem it is meant to solve.”
Instead, the group recommends more structural reforms, such as cutting red tape and freeing up labour markets.
BIS also fears some financial markets are due a sharp correction, as their recent surges may have been based on “euphoria,” rather than fundamentals.
Britain’s Bank rate is at a historic low of 0.5 per cent, but is expected to rise soon, with 2.5 per cent the likely “new norm”, according to governor Mark Carney.