Financial markets’ shaky start to the year shows they are losing faith in the “healing powers” of central banks, the Bank for International Settlements (BIS) said on Sunday while voicing concerns over sub-zero interest rates and emerging economies.
The Swiss-based organization, which fosters cooperation between central banks in the pursuit of monetary and financial stability, said that recent worries over China’s economy, oil and commodity prices and some European banks had come as fundamental shifts take place in the global economy.
International bank-to-bank lending is contracting for the first time in two years, the use of dollar-denominated debt to drive growth in emerging markets has ground to a halt on a strengthening of the currency that has also served to send US companies rushing to borrow in euros.
At the same time, world growth remains subdued, overall debt continues to rise and negative interest rates in large parts of Europe and Japan suggest that some leading central banks are running low on ammunition to quell market volatility that could pose a threat to the global economy.
“The latest turbulence has hammered home the message that central banks have been overburdened for far too long post-crisis,” the head of the BIS monetary and economics department, Claudio Borio, said in its first quarterly report of the year.
“Market participants have taken notice. And their confidence in central banks’ healing powers has - probably for the first time - been faltering. Policymakers, too, would do well to take notice.”
The comments dovetailed with concerns about the potential side-effects of negative interest rates, which are effectively a charge on commercial banks’ spare cash.
A study in the BIS report showed the different ways negative rates were being implemented by the likes of Sweden, Denmark, Switzerland, Japan and the European Central Bank, which is expected to go even deeper into negative territory on Thursday.
Knock-on effects
Evidence from Switzerland showed that banks there had not introduced negative rates on customers’ savings but had instead increased costs on loans such as mortgages to curb losses.
“If negative policy rates do not feed into lending rates for households and firms, they largely lose their rationale,” the study said.
