STOCK SELL OFF REVEALS MAJOR FAULTLINES IN ECONOMY, BIS SAYS

The sell-offs rocking equity markets reflect the “release of pressure” accumulated along “major faultlines”, the Bank for International Settlements said, as it warned that investors should not expect central banks to ride to the rescue and solve such deep-rooted problems. In a gloomy assessment of the turmoil that has shaken global stock markets in recent weeks, the BIS, which acts as the central bank of central banks, said emerging markets were particularly exposed to the unwinding of financial vulnerabilities built up since the 2008 crisis. The stark warning comes days ahead of a critical meeting by the US Federal Reserve, which will decide whether to increase interest rates for the first time in nearly a decade. An increasing number of investors believe the Fed is likely to wait until the autumn before pulling the trigger. Still, policymakers across the developing world are bracing for the possibility that such a momentous move will prompt flights of capital and steep currency devaluations across Africa, Asia and Latin America. Unlike the International Monetary Fund and the World Bank, which have both called for the Fed to delay its “lift-off”, the BIS believes the problems facing emerging markets are partly a consequence of the ultra-low borrowing costs that have prevailed since the crisis. “This is . . . a world in which interest rates have been extraordinarily low for exceptionally long and in which financial markets have worryingly come to depend on central banks’ every word and deed, in turn complicating the needed policy normalisation,” said Claudio Borio, head of the BIS’ Monetary and Economic Department.FT