Efforts by the major central banks to spur an economic recovery by providing guidance on what will happen to interest rates could endanger the global financial system, top economists at the Bank for International Settlements have warned.
Investors are being encouraged to load up on risk because they believe that forward guidance will warn them about impending rises in interest rates, according to research published by the institution known as the central bankers’ bank. It could also result in rates remaining too low for too long because central banks fear the reaction of markets to any rate rise, fuelling riskier behaviour.
The guidance, which all four of the world’s leading central banks have undertaken, could raise the threat of “an unhealthy accumulation of financial imbalances”, economists Andrew Filardo, who heads the BIS’ monetary policy unit, and Boris Hofmann argue. It could also cause panic if investors believe that the guidance had changed unexpectedly.