The Bank for International Settlements has warned that “euphoric” financial markets have become detached from the reality of a lingering post-crisis malaise, as it called for governments to ditch policies that risk stoking unsustainable asset booms.
While the global economy was struggling to escape the shadow of the crisis of 2007-09, capital markets are “extraordinarily buoyant”, the Basel bank said, in part because of the ultra-low monetary policy being pursued around the world.
Leading central banks should not fall into the trap of raising rates “too slowly and too late”, said the BIS, the bank for central banks, calling for policy makers to halt the steady rise in debt burdens around the world and embark on reforms to boost productivity.
In its annual report, the BIS also warned of the risks brewing in emerging markets, setting out early warning indicators of possible banking crises in a number of jurisdictions, including most notably China.
“Particularly for countries in the late stages of financial booms, the trade-off is now between the risk of bringing forward the downward leg of the cycle and that of suffering a bigger bust later on,” it said.
The BIS has long been a sceptic about the benefits of ultra-stimulative monetary and fiscal policies and its latest intervention reflects mounting concern that the rebound in capital markets and real estate is built on fragile foundations.
The report comes days after the Bank of England became the first big central bank to raid its new macroprudential toolkit to stop a credit boom in the housing market from derailing the UK’s economic recovery. The BoE hopes its restrictions on riskier forms of mortgage lending will tame any property bubble without damaging growth. But the BIS warned that deploying macroprudential tools, which central banks have adopted, was a poor substitute for higher rates.
“These tools have proved very helpful in increasing the resilience of the financial system, but they have been only partially effective in restraining the build-up of financial imbalances,” the BIS said. “Failing to rely on monetary policy can raise even more serious challenges down the road.”
The BIS’s view on interest rates is at odds with the stance of the International Monetary Fund, which this month called on the European Central Bank to ease monetary policy by embarking on large-scale asset purchases, should the threat of a dangerous bout of falling prices persist.
“Good policy is less a question of seeking to pump up growth at all costs than of removing the obstacles that hold it back,” the BIS argued, saying the upturn in the global economy was a precious opportunity for reform.
Global markets are “under the spell” of central banks and their unprecedented monetary policy settings, it said.
The Vix index of US share price volatility, known as the Wall Street fear gauge, has fallen to a seven-year low, while the FTSE all-world share index is 150 per cent above its March 2009 low. Yields on 10-year US Treasuries, which move inversely with prices, have fallen this year, defying expectations of an end to a 30-year bond market rally.
衡量美国股市波动性、有华尔街“恐慌指数”之称的Vix指数，已跌至7年低点；富时环球股票指数(FTSE All-World share index)眼下为2009年3月低点的1.5倍。10年期美国国债收益率（与价格变动方向相反）今年下跌，打破了有些人对30年债券市场牛市将于今年结束的预期。