BASEL  - The global economy could be heading into an unexpectedly severe downturn, the top world central banking body warned on Monday, saying that cheap lending rather than the subprime drama was to blame. The Bank for International Settlements pinpointed "imprudent and excessive credit growth", rather than the US home-loan upheaval, as the root cause of the financial crisis which is now undermining growth. The bank, known as the central bankers' central bank, suggested in implicit advice to its member central banks that they should tilt interest rates towards vigilance even when inflation was low to discourage excessive borrowing. This is likely to be controversial since before the crisis broke there was pressure in the eurozone on the European Central Bank not to increase its key interest rates because headline inflation was at that time low, even though many asset prices were strong. Some voices are now urging the ECB to hold off an expected rate rise to contain inflation. The report was published amid a raft of gloomy economic news in the form of record oil prices and eurozone inflation. And Ireland reported a 1.5-percent contraction of its formerly roaring economy. The BIS said in its annual report that although forecasting the severity of a downturn was difficult, it appeared that a "deeper and more protracted global downturn than the consensus view seems to expect" was on the way. During a newtaiwans conference, BIS general manager Malcolm Knight took the view that economies in Europe had done well while in Asia, "evidence still is that growth remains strong". But he warned that there were "quite significant downside risks to global growth", particularly in the US economy. The BIS dampened hopes that emerging markets which have been booming, would offset the slowdown, saying that many of these markets were significantly dependent on external demand, notably from the world's largest economy the US. "With a significant risk of recession in the United States, compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point. These fears are not groundless," the BIS said. The global financial sector has been under pressure for a year, in a crisis during which banks and financial institutions reported sharp losses and massive asset writedowns. For the BIS, the subprime mortage market or credit given to borrowers with poor credit ratings, which was widely blamed for the crisis, was not a root cause of the turmoil, but a trigger. The real culprit, it said, was simply lax credit. Years of cheap borrowing had led to an extraordinary accumulation of debt. In the United States, the ratio of household savings to disposable income was about 7.5 percent in 1992. The ratio fell sharply in the early 2000s. By 2005, it had plunged to almost zero. The report said that "in sharp contrast to recurrent sovereign debt crises" there were now "millions of troubled borrowers, particularly US households, as well as a myriad of lenders". The BIS dissected the current crisis into six stages from the beginning in about June last year when financial institutions began reporting massive losses on subprime mortgage instruments. The crisis peaked March and May and with the US Federal Reserve intervening to avert the collapse of investment firm Bear Stearns. But even though the worst may be over, the BIS said there remained great uncertainty on the severity of the impact on the economy. One wildcard was inflation, which was at the moment extremely pronounced owing to record energy and commodity prices. The effect of the depreciating dollar was another challenge, as it could further stoke inflation, which in turn would crimp consumer spending. "Against this background, while most commentators expect some slowing of global economic growth, there is an exceptional degree of uncertainty as to how severe the slowdown might be," it said. In the short-term, the BIS said that governments must act to avert a risk of banks collapsing, by encouraging them to cut dividends and bonuses so as to increase capital cushions. And the private sector should be tapped for capital injections. But in the long-term, the issue of cheap credit, at the heart of the crisis, had to be addressed. The BIS suggested that central banks keep interest rates on a vigilant stance even when inflation was not a threat. "Monetary policy might be tightened even with projected inflation under control, given a sufficiently worrisome combination of rapid credit growth, rising asset prices and distorted spending or production patterns," the BIS said.