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'Financial Catastrophe Looms': Analyst

Business (tags: economy, money, world, debt, credit problem )

Bea
- 102 days ago - abc.net.au

<p>The Bank for International Settlements (BIS) says global markets may still be set for severe economic downturn. </p>



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Bea B. (236)

Monday June 30, 2008, 7:13 pm
BIS: Financial experts say slowdown will be worse than expectedAshley Seager The Guardian, Tuesday July 1, 2008 Article historyThe world economy is probably facing a deeper and more prolonged slowdown than many assume, but central banks may still have to raise interest rates to stamp out inflation, the influential Bank for International Settlements said yesterday.

In its annual report, the BIS - the central banks' central bank - said that although the worst of the credit crisis seemed to be over, that did not sound the all-clear for the world economy. It said the credit crunch was a reflection of deeper problems relating to a huge build-up of debt in recent years. There could be continued turmoil in markets, slowing economic growth, and a temporary increase in inflation.

"While difficult to predict, their interaction does appear to point to a deeper and more protracted global downturn than the consensus view seems to expect," the bank said.

The BIS report carries particular weight because it was the first to warn last year about the severity of the credit crunch. But while the Basle-based institution was concerned about the outlook for growth, it was more worried about inflation.

"With inflation a clear and present threat, and with real policy rates in most countries very low by historical standards, a global bias towards monetary tightening would seem appropriate."

It said there could not be a "one-size -fits-all" approach since inflationary pressures were not the same everywhere; some central banks had cut rates because they were worried about slowing growth. It said slowing growth might drag inflation down at some point.

The BIS took issue with central bankers such as Mervyn King, Bank of England governor, who argued during Britain's house price boom that there was little point in trying to stop price bubbles. "The principal conclusion to be drawn from today's policy challenges is that it would have been better to avoid the build-up of credit excesses in the first place," it said.