The Bank for International Settlements (BIS) warned yesterday that ultra-low interest rate policies represent a threat to the global financial system. According to the BIS, low borrowing costs have promoted asset bubbles that are now verging on the unsustainable and are eerily reminiscent of the property price collapse that ushered in the recession in 2007.
During the recession many central banks resorted to an Ã¢â‚¬Å“easy moneyÃ¢â‚¬Â policy to promote financial activity. As growth has slowly returned to the afflicted economies, central banks are easing interest rates higher but they remain for the most part well below the pre-recession norm.
There are hold-outs to the trend however with the U.S. Federal Reserve refusing to budge from its record low rate capped at just 0.25 percent. Even as recently as the June 23rd FOMC statement the Fed remained committed to the current rate stating that the present conditions Ã¢â‚¬Å“are likely to warrant exceptionally low levels of the federal funds rate for an extended period.Ã¢â‚¬Â
ChinaÃ¢â‚¬â„¢s Property Bubble
It is not just the U.S. that Ã¢â‚¬â€œ in the words of the BIS Ã¢â‚¬â€œ risks the creation of Ã¢â‚¬Å“financial distortionsÃ¢â‚¬Â through its monetary policies. Hedge fund manager Jim Chanos was among the first to warn that rapidly rising property values and inflation were creating the perfect conditions for a property bubble within the emerging Asian economies. Chanos continues to caution investors of ChinaÃ¢â‚¬â„¢s dependency on development to drive the economy and the possibility that a plunge in property values could trigger a recession.
China has made attempts in recent years to slow the pace of inflation and surging property values. The PeopleÃ¢â‚¬â„¢s Bank of China has tightened lending rules, raised interest rates, and even imposed eligibility requirements to limit property speculation and ease demand for new properties. The results have been mixed; in May, despite the BankÃ¢â‚¬â„¢s efforts, new home prices still increased in 67 of 70 cities.
For the global economy there are fears that higher energy and commodity prices in China will be Ã¢â‚¬Å“exportedÃ¢â‚¬Â to other countries through increased costs to the consumer. This means that consumers in America may find themselves sharing the inflation burden through higher prices for products manufactured in China.
This is a case of very poor timing on the part of ChinaÃ¢â‚¬â„¢s exporters. American consumer confidence has taken a turn for the worse and higher prices on goods shipped to the U.S. could suffer a decline in demand. Spiking energy and food prices are taking a greater share of each consumer dollar leaving less for non-essential goods and services and consumers are keeping a close watch on their expenditures.