Interest rates must rise

Nia Williams

June 27, 2011

The BIS has warned that the low cost of borrowing has resulted in a credit and property price boom that is fuelling inflation especially in emerging economies.

One of the biggest concerns that economists and analysts have about low interest rates is the formation of asset bubbles. They have warned that availability of easy credit and low interest rates are driving up property prices to unsustainable levels.

The BIS said in its annual report: “Property prices in a number of emerging market economies are advancing at staggeringly rapid rates and private sector indebtedness is rising fast.

“Emerging market economies managed to escape the worst of the crisis, but many now run the risk of building up imbalances very similar to those seen in advanced economies in the lead-up to the crisis.”

Since the financial crisis, central banks across the globe have cut interest rates in an attempt to boost growth however the BIS have warned that the policy may prove to be counterproductive.

The BIS said: “The prolonged period of very low interest rates entails the risk of creating serious financial distortions, misallocations of resources and delay in the necessary deleveraging in those advanced countries most affected by the crisis.”

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