By Simon Miller

The Bank of International Settlements (BIS) has warned that loose monetary policy could delay recovery and threatened to damage central banks’ credibility and destroy their independence.

In its annual report it said prolonged and aggressive monetary accommodation “may delay the return to a self-sustaining recovery”.

It added that it could also undermine the perceived need to deal with banks’ impaired assets, masking lenders’ bad debts.

Noting that the Bank of England had been one of the most active central banks for quantatitive easing, BIS continued: “The extraordinary persistence of loose monetary policy is largely the result of insufficient action by governments in addressing structural problems. Simply put: central banks are being cornered into prolonging monetary stimulus as governments drag their feet and adjustment is delayed. This intense pressure puts at risk the central banks' price stability objective, their credibility and, ultimately, their independence.”

The annual report warned that there was too much debt in the system and efforts to deal with this by banks, governments and households were dragging down the world’s economy.

It commented: “The world is now five years on from the outbreak of the financial
crisis, yet the global economy is still unbalanced and seemingly becoming more so. Big banks continue to have an interest in driving up their leverage without enough regard for the consequences of failure: because of their systemic weight, they expect the public sector to cover the downside.”

BIS added: “Another worrying sign is that trading, after a brief crisis-induced squeeze, has again become a major source of income for large banks. These conditions are moving the financial sector towards the same high risk profile it had before the crisis.”

At the bank’s annual general meeting on Sunday, BIS General Manager Jaime Caruana commented: “The current difficulties of the world economy have deep roots and will require fundamental solutions. Fiscal adjustment, the repair of banks' balance sheets and other reforms cannot be put off in the hope of better times. Relying only on central banks but failing to act on other fronts would ultimately damage confidence and increase the risks to macroeconomic and financial stability.”

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