Monday 25th June 2007
Investments could depreciate in value if interest rates rise further, it has been warned.
The Bank for International Settlements (BIS) - commonly known as "the bank of banks" - claims that increasing willingness to place money in investments could ultimately cause them to fall in value.
In its 77th annual report, the bank states that long-term low prices of investments may result in a greater amount of money being spent.
However, the report predicts that this could result in widespread depreciation if market liquidity were to dry up.
The BIS espouses an increase in interest rates in order to combat high amounts of spending, although it recognises that many economists do not believe there to be a direct link between base rates and the level of inflation.
While it suggests there is an immediate effect on inflation following an interest rate change, the bank describes a school of thought which dismisses any long-term impact.
Meanwhile, it advises that those who do believe in a long-term effect are more likely to panic when they witness high inflation due to an associated belief in a "boom and bust" cycle for the economy.
Either school of thought could welcome an increase in interest rates in the coming months, according to the BIS.
"Those who are concerned with near-term inflation as well as those concerned about a further build-up of medium-term imbalances might welcome further tightening," the report claims.
"Inflation pressures globally seem to be increasing, while evidence of various imbalances continues to mount almost everywhere."
General manager Malcolm Knight added in a speech this weekend that "it would not be prudent to take much comfort" from predictions of future financial stability as inflationary risks have historically been difficult to anticipate.
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