Fears that cheap money is damaging fragile economy

Tim Wallace
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ULTRA-LOW interest rates risk harming rather than helping the economy, top central bankers and the International Monetary Fund (IMF) warned yesterday, in stark contrast to the Bank of England’s view that loose policy is still best.

The economy’s rebalancing can be undermined, inflation may be hard to get back under control, and the eventual raising of interest rates will become tougher and more dangerous, according to Jamie Caruana from the Bank of International Settlements (BIS).

“Prolonged monetary accommodation gives borrowers, financial institutions and policymakers an incentive to keep kicking the can down the road, delaying necessary repair and reform,” said Caruana.

And it “can produce other side effects. Monetary stimulus may find its way into asset prices and leverage before influencing goods and services price inflation. Moreover, prolonged very low rates can distort market signals.”

He also warned that central bankers fought hard to cut inflation in the 1970s and 1980s, even at the cost of high unemployment because it was best for long-term growth.

“These are hard-earned lessons that should not be forgotten,” Caruana warned.

By contrast the Bank of England has accepted above-target inflation in exchange for lower unemployment, and is expected to ease more under incoming head Mark Carney.

The IMF joined BIS in warning the Bank against keeping rates very low when the economy is improving, arguing it could have damaging side effects. “Risk taking behaviour, spurred by accommodative monetary policies, could undermine financial stability,” it said.

Meanwhile, John Williams, president of the Federal Reserve Bank of San Francisco, said last night the Fed may “reduce somewhat the pace of our securities purchases, perhaps as early as this summer,” if the US jobs market “considerably” improves.