Investing.com - The Bank for International Settlements (BIS) warned that a global storm was rising for the world’s economy as central banks pushed rates into negative territory and may be running out of effective options.
“The uneasy calm has given way to turbulence,” BIS chief Claudio Borio began his media brief on a quarterly report released on Sunday by the institution hailed to be the central bank of the central banks.
Borio remarked on how the new year had greeted investors with one of the worst sell-offs on record, as they digested the historic rate hike made by the Federal Reserve after the price of money had spent seven years at zero and were confronted by the slowdown in China.
Though the BIS chief admitted that markets have recently regained a certain composure, he warned that “we may not be seeing isolated bolts from the blue, but the signs of a gathering storm that has been building for a long time”.
Apart from a weak global economic outlook, the Basel-based bank was worried about the options left to central bankers and feared that markets may be losing confidence in their ability to react.
“Underlying some of the turbulence was market participants' growing concern over the dwindling options for policy support in the face of the weakening growth outlook,” the BIS explained.
“With fiscal space tight and structural policies largely dormant, central bank measures were seen to be approaching their limits,” the bank added.
At the heart of the issue was the decision by five central banks –European Central Bank (ECB), Swiss National Bank (SNB), Danmark’s Nationalbank (DN), Riksbank and Bank of Japan (BoJ)- to push rates into negative territory and the uncertainty that the move would actually be effective.
“If negative policy rates do not feed into lending rates for households and firms, they largely lose their rationale,” BIS economists noted, adding that even if the negative rates were transmitted efficiently, they could cause harm to banks’ profitability.
In this light, Borio insisted that there was “narrowing room for policy manoeuvre” and pointed out that even the current exceptionally accommodative monetary policy had failed to resolve disappointing growth in key jurisdictions and inflation that remained stubbornly low.
“Market participants have taken notice,” Borio said. “And their confidence in central banks’ healing powers has – probably for the first time – been faltering.”
“Policymakers too would do well to take notice,” Borio concluded.