BIS cautions central banks on premature rate cuts

The Bank for International Settlements (BIS) cautioned central banks to avoid hastily cutting interest rates, urging them to maintain adequate “safety margins” to handle potential economic downturns and unforeseen crises.

This advice came in a report published on Monday as markets anticipate the US Federal Reserve’s potential rate cut this week, which would mark its first reduction in four years.

Claudio Borio, head of the BIS Monetary and Economic Department, emphasised the importance of preserving monetary policy buffers.

“It would be a pity if this room for manoeuvre was squandered,” Borio said.

He highlighted the need for central banks to be prepared for both anticipated recessions and unexpected shocks, similar to those experienced during the COVID-19 pandemic.

The BIS report also analysed recent market volatility, including significant declines in US tech stocks and upheavals linked to the Bank of Japan’s shift towards higher interest rates.

Additionally, the report raised concerns about the growing role of private equity in life insurance markets, which has increased financial interconnectedness and exposed insurers to higher risks.

The BIS’s latest findings underscore the complex landscape of global finance and the need for cautious and informed policy decisions.