A surge in lending due to low cost of borrowing in emerging economies has resulted in higher prices The Bank for International Settlements (BIS) has warned that low interest rates across the globe are a threat to world financial stability.The BIS warned low cost of borrowing had resulted in a credit and property price boom that was fuelling inflation, especially in emerging economies.
Central banks across the globe have cut interest rates in an attempt to boost growth after the 2008 financial crisis.
However, BIS warned that the policy may prove to be counterproductive.
"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," the bank said in its annual report.
The BIS is an organisation of international central banks which is not accountable to any national government.
'Inflation fighting credibility'While loose monetary policies and availability of easy credit have triggered growth, there has been a flip side to it as well.
Emerging economies, especially in Asia, have had to deal with rising prices for food and other essential commodities.
This has pushed up the cost of living and has threatened to derail growth in many developing nations.
The BIS warned that the central banks needed to change their policies in order to deal with the situation.
"Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks," it said.
"It is also crucial if central banks are to preserve their hard-won inflation fighting credibility," the bank added.
Asset bubbles Continue reading the main storyAll financial crises, especially those generated by a credit-fuelled property price boom, leave long-lasting wreckage”End Quote Bank for International Settlements 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.
"Property prices in a number of emerging market economies are advancing at staggeringly rapid rates, and private sector indebtedness is rising fast," the BIS said.
It also warned that the trend was very similar to that triggered by the global financial crisis.
"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," the bank said.
The BIS warned that the surge in property prices had resulted in over development in the real estate market, leaving large numbers of properties unsold.
"It will take years to absorb this overhang," the bank said.
The bank warned that if not addressed immediately, a crash in the property market may derail economic growth in emerging economies.
"All financial crises, especially those generated by a credit-fuelled property price boom, leave long-lasting wreckage," the bank said.
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