Central banks' failure to appreciate the the limits of monetary policy can lead to the lenders being overburdened, with potentially serious adverse consequences, the Bank of International Settlements (BIS) warned in its annual report published Sunday.
"The growing gap between what central banks are expected to deliver and what they can actually deliver could in the longer term undermine their credibility and operational autonomy."
Prolonged and aggressive monetary accommodation has side effects that may delay the return to a self-sustaining recovery and may create risks for financial and price stability globally, it said.
"With policy rates in the core advanced economies at the effective lower bound for more than three years now and central bank balance sheets continuing to expand, these possible side effects bear close watching," the bank said in the report.
The accommodative monetary stance by central banks of developed economies is being transmitted to emerging market economies in the form of undesirable exchange rate and capital flow volatility, BIS said.
Analyzing the impacts of monetary accommodation in the face of financial crises, the bank said prolonged unusually accommodative monetary conditions often mask underlying balance sheet problems and reduce incentives to address them head-on.
These monetary conditions may over time undermine banks' profitability. Low short- and long-term interest rates may create risks of renewed excessive risk-taking, while aggressive and protracted monetary accommodation may distort financial markets.
by RTT Staff Writer
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