An influential group of leading world banks warned Thursday that central banks are pumping out too much easy money and markets risk becoming dangerously addicted to ultra-low interest rates.
The Institute of International Finance, which groups 450 banks, said if central banks continue to flood money into the global economy then any future bid to get it under control could itself destabilize the financial system.
“Much of the recovery so far has… been heavily reliant on ‘easy money’ conditions fostered by central banks,” the IIF said, in a statement,
“These conditions — quantitative easing, very low interest rates — cannot last forever, but the risk is that financial markets have become addicted to them,” it warned.
“The longer central bank liquidity is relied on to hold things together, the more excesses and distortions are being accumulated in the financial system. An eventual unwinding of these excesses will become a destabilizing risk event.”
The IIF said the US Dow Jones Industrial Average’s had hit an all-time high this week more because of relaxed international monetary conditions than thanks to any recovery in the real economy.
The group also said that major central banks are doing “whatever it takes” to stabilize markets and boost growth because necessary reforms are being stalled by political deadlock in many countries.
“The critical problem resulting from prolonged political stalemate is that essential policy reforms could be delayed — with the consequence that wider investor confidence may be undermined,” the banks said.
IIF deputy managing director Hung Tran said that central bankers should be aware of “the unintended consequences of their actions” and make clear how they expect to adjust monetary policy over the long term.
“This would help lessen the risk of large swings in financial markets,” he said.