By Max Clarke

Low interest rates are encouraging high risk practices and may be fundamentally undermining the global financial recovery, the Bank of International Settlements’ General Manager, Jamie Caruana today said at the Bank’s annual general meeting.

Booming commodity prices have pushed up developed economies’ inflation rates in the short-term, while at the same time a more general inflationary pressure resulting from higher wages and more expensive manufactured goods in emerging markets continues to push up prices in the West.

Developed countries, including the UK where interest rates have been held at their historic low of 0.5% for more than two years in a bid to stimulate recovery, are threatening the global recovery by ignoring the persistent threat posed by inflation and keeping interest rates low.

The solution, argues Caruana, is to normalise economic policy. By removing the current overly relaxed economic policies and favouring tighter rates, more lasting monetary and fiscal stability can be developed.

The nature of the financial crash, history suggests, will entail a slow recovery as debt burdens take a long time to fall. Instead of addressing this issue with long term policy, governments have simply been focussing on short-term fixes like lax monetary policy which further risk global fiscal security.