Economic recovery in danger if stimulus not cut: BIS

28th June 2010, Comments 0 comments

The Bank for International Settlements warned on Monday that economic recovery is at risk of a relapse if governments do not move fast to wind down crisis stimulus programmes.

In its annual report, the global central bank body called for "immediate" steps to cut budget deficits and debt accumulation in "several industrial countries", which were not named.

The BIS said the crisis had left a "daunting legacy" especially in industralised nations, where the recovery was still fragile and uneven.

However, while support measures had prevented the worse by stifling contagion, they sapped confidence by delaying "much needed adjustments in the real economy and financial sector," it added.

"The combination of remaining vulnerabilities in the financial system and the side effects of ongoing intensive care threaten to send the patient into relapse and to undermine reform efforts," the report underlined.

"Macroeconomic support has its limits," it added.

The BIS said recent reaction of financial markets showed that those limits had been reached in several countries.

The 206 page annual report was released a day after leaders of the world's 20 leading economies finished a two-day meeting with a commitment to at least halve deficits by 2013 and stabilise or reduce government debts by 2016.

Despite low inflation and the fragile economy, the BIS also hinted at a shift in monetary policy towards interest rate hikes.

"It is important to bear in mind that keeping interest rates near zero for too long, with abundant liquidity, leads to distortions and creates risk for financial and monetary stability," the report said.

The BIS also reiterated its call for fundamental reform of the financial system, including more effective regulation, at the same time as the shift in economic and monetary policy, to provide "more stable foundations" for growth.

Through last year central bankers were earnestly looking for the signals for the right moment for governments to unwind spending programmes that were implemented to dampen the crisis and stimulate a recovery.

The report also warned that banking industry was highly exposed to the the deteriorating commercial property market.

The BIS groups more than 54 major central banks.

© 2010 AFP

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