News Column


June 30, 2014

By Ruth Sunderland, Daily Mail, London

June 30--BRITAIN and other countries risk being caught in a 'debt trap' if ultra-low interest rates carry on for too much longer, the Basel-based Bank for International Settlements has warned.

It said nations that have tried to boost their economies by cutting base rates to rock bottom could find themselves in a downward spiral, as cheap interest costs encourage even more borrowing.

The influential global banking watchdog does not single out individual countries for censure but its words clearly apply to Britain, which has seen the base rate pegged at 0.5pc since March 2009.

Jaime Caruana, head of the BIS, said if rates persist at this level, it will create a 'highly undesirable' combination of high debt, 'anaemic growth' and poor productivity. Debt levels in advanced economies are still growing he said, and now stand at a ratio of 275pc to GDP.

He added that there are signs of 'dangerous' over-confidence in financial markets that have convinced themselves rates will stay low for a very long time. The 'euphoria' in financial markets is detached from the reality of weak investment in the real economy and political tensions around the world.

Officials in the UK are trying to prepare households and firms for an increase in the cost of loans. The departing deputy governor of the Bank of England, Sir Charlie Bean, yesterday indicated that base rates could reach 5pc within the next ten years. Governor Mark Carney has signalled borrowing costs will rise only gradually and could be at 2.5pc by 2017.

The BIS the only major organisation to warn of the financial crisis ahead of time wants governments and policymakers to start reducing national debts and rebalancing their economies instead of relying on cheap money to prop up growth.

Its report said: 'Countries could at some point find themselves in a debt trap: seeking to stimulate the economy through low interest rates encourages even more debt, ultimately adding to the problem it is meant to solve.'


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Source: Daily Mail (London, England)

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