Uneven global recovery creates ‘daunting challenges’ for policymakers, says BIS | WKZO | All Kalamazoo
By Marc Jones
LONDON (Reuters) – An uneven global recovery from the COVID-19 crisis will make the recalibration of fiscal and monetary stimulus a “daunting” challenge for policymakers, the Bank for International Settlements annual report said on Tuesday.
Dubbed the central bank of the world’s central banks, the Switzerland-based BIS has said its primary scenario is of a strong global recovery, albeit at varying speeds across countries.
The bank presented two alternative scenarios. A country where significant fiscal stimulus and a reduction in accumulated savings lead to stronger growth, but also higher inflation and a substantial tightening of global financial conditions. In the other, the growth disappoints because the virus is more difficult to control.
“While the recovery is underway and the central scenario is relatively benign, we are not out of the woods yet,” said BIS director Agustin Carstens.
The uneven recovery could leave emerging countries at the forefront of all odds, particularly in the higher inflation scenario, where large central banks like the US Federal Reserve begin to look to raise interest rates.
Carstens, who headed Mexico’s central bank before joining the BIS, said it was healthy that some emerging markets were already raising rates in response to rising inflation, but stressed that he expected what advanced economies expect.
“It would not be appropriate to tighten monetary policy today simply to reduce measured inflation and sacrifice a recovery in the economy,” Carstens told Reuters. “Is this something the (big) central banks would like to do today?” I do not think so.
Instead, he predicted more periods of ‘noise’ for financial markets after bond and equity price volatility between January and March, when vaccination programs prompted investors to try and anticipate a decline. support from the Fed.
“The main challenge (for the rest of the year) is how to coordinate market expectations with the conduct of policy.” Carstens said. “I think one of the hiccups we’ve seen over the past few months has been the market to the Fed.”
The key question is whether the recent sharp increases in inflation will be temporary or more persistent. âTo date, we at the BIS consider this to be most likely temporary,â Carstens said, citing base effects and that the supply bottlenecks that have also driven prices up should dissipate. .
Chart: Pandemic stimulus drives asset prices up – https://fingfx.thomsonreuters.com/gfx/mkt/oakpedajwvr/Pasted%20image%201624962460618.png
In the longer term, many challenges lie ahead and the normalization of fiscal and monetary policies will not be easy. Public debt is at its peak after World War II. Likewise, central bank balance sheets rarely reached similar heights, and only during wars.
âThe uneven recovery creates significant challenges for policymakers,â the BIS report said.
âDebt sustainability can change if interest rates start to rise,â Carstens added. âYou don’t want to be surprised. “
The BIS has also strongly endorsed the central bank’s digital currencies and stepped up its criticism of cryptocurrencies like bitcoin, warning that they were “speculative assets rather than cash.”
The report also examined how COVID’s disproportionate damage to lowest-paid workers and the stock market surge driven by billions of dollars in stimulus intensified concerns about inequality.
These concerns have grown since the financial crisis of more than a decade ago. The current surge in global house prices – another of the BRI’s main macroeconomic concerns at the moment – generally favors the elderly over the young.
“It would be unrealistic, if not counterproductive, to steer monetary policy towards tackling inequality,” the BIS said, as it could reduce some of the flexibility needed to help economies and control inflation, which should both help reduce inequalities for longer. -term.
Chart: Rising Wealth Inequalities – https://fingfx.thomsonreuters.com/gfx/mkt/jbyvrzrlzve/Pasted%20image%201624920829453.png
The BIS’s annual accounts, released along with its report, showed the bank made a net profit of SDR 1.23 billion for the year. SDRs or Special Drawing Rights are the reserve asset of the IMF and the amount amounts to approximately $ 1.75 billion or â¬ 1.5 billion.
The pandemic has meant that the BIS has removed the 2020 “dividend” it pays to central banks that are ranked among its members, but this year it paid 520 SDR per share to make up for it.
The bank said the BIS board also offered to pay SDR 300 million into a special dividend reserve fund to ensure payments can be made in future crises.
Chart: House prices rise above fundamentals – https://fingfx.thomsonreuters.com/gfx/mkt/ygdpzzwwgpw/Pasted%20image%201624926885898.png
(1 euro = $ 1.1909)
(Reporting by Marc Jones. Editing by Jane Merriman)