While financial markets have regained some composure since the start of the year, mounting global debt levels, sticky growth and the prospect of long-term negative rates are issues that are not going away anytime soon, the Bank for International Settlements has warned.
Concerns about growth in China and other emerging market economies and the health of some of the world's largest banks made for a very difficult start to 2016 for most investors, resulting in one of the worst stock market sell-offs since the financial crisis of 2008.
"Underlying some of the turbulence was market participants' growing concern over the dwindling options for policy support in the face of the weakening growth outlook," the Basel based group, which serves as a representative for central banks around the world said in its quarterly review, published Sunday.
More recently, markets have "regained a certain composure", after some positive economic indicators from the U.S. and a rate cut from China, which reduced the amount of cash banks must hold as reserves, helped boost sentiment.
But the narrowing range of tools on offer for central banks to tackle sluggish growth as interest rates descend into negative territory and the unsustainable debt burdens, particularly in emerging markets point to a "gathering storm", head of the monetary and economic department at the BIS, Claudio Borio said.
"We may not be seeing isolated bolts from the blue, but the signs of a gathering storm that has been building for a long time," Borio said.
"The latest turbulence has hammered home the message that central banks have been overburdened for far too long post-crisis, even as fiscal space has been dwindling and structural measures lacking. Despite exceptionally easy monetary conditions, in key jurisdictions growth has been disappointing and inflation has remained stubbornly low," he said.
The Swiss watchdog warned of "great" uncertainty about the behavior of individuals and institutions if rates were to decline further into negative territory or remain negative for a prolonged period.
"Market participants have taken notice. And their confidence in central banks' healing powers has – probably for the first time – been faltering. Policymakers too would do well to take notice," Borio added.