© Reuters. FILE PHOTO: Customers drink, eat and talk at well-spaced tables in Almanac Taproom’s former pandemic-turned-brewery parking lot in Alameda, California, USA, June 4, 2021. REUTERS / Ann Saphir
By Marc Jones
LONDON (Reuters) – An uneven global recovery from the COVID-19 crisis will make recalibrating fiscal and monetary stimulus an “overwhelming” challenge for policy makers, the Bank for International Settlements annual report said on Tuesday.
Dubbed the central bank of the world’s central banks, the Switzerland-based BIS said its main scenario was that of a robust global recovery, working at different speeds between countries.
The bank raised two alternative scenarios. One in which a large fiscal stimulus and a reduction in accumulated savings result in stronger growth, but also higher inflation and a substantial tightening of global financial conditions. In the other, growth is disappointing as 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 Agustín Carstens.
The uneven recovery could leave emerging market countries at the sharpest end of any difficulty, especially in the scenario of higher inflation, where major central banks such as the US Federal Reserve begin to seek 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 expects advanced economies to wait.
“It would not be appropriate to tighten monetary policy today just to reduce measured inflation and sacrifice an economic recovery,” Carstens told Reuters. “Is that something that (major) central banks would want to do today? I don’t think so.”
Instead, he predicted more periods of “noise” for financial markets after the volatility in bond and equity prices between January and March, when vaccination programs prompted investors to try to anticipate a reduction in support. from the Fed.
“The main challenge (for the rest of the year) is how to coordinate the expectations of the market with the conduct of politics.” Carstens said. “I think one of the setbacks we saw in the last few months was the market getting ahead of the Fed.”
The key question is whether the recent sharp increases in inflation will be temporary or more persistent. “As of today, we at the BIS believe that it is most likely temporary,” Carstens said, citing base effects and that supply bottlenecks that have also raised prices should dissipate.
Chart: Pandemic Stimulus Raises Asset Prices: https://fingfx.thomsonreuters.com/gfx/mkt/oakpedajwvr/Pasted%20image%201624962460618.png
In the long term, many challenges lie ahead and the normalization of fiscal and monetary policies will not be easy. Public debt is at a post-WWII peak. Similarly, central bank balance sheets have rarely reached similar heights, and only during wars.
“The uneven recovery creates enormous challenges for policy makers,” the BIS report said.
“Debt sustainability may change if interest rates start to rise,” added Carstens. “He doesn’t want to be surprised.”
The BIS also heavily supported central bank digital currencies and raised criticism of cryptocurrencies like bitcoin, warning that they were “speculative assets rather than money.”
The report also looked at how COVID’s disproportionate damage to lower-wage workers and the jump in stock markets fueled by trillions of stimulus dollars was intensifying concerns about inequality.
These concerns have been on the rise since the financial crisis more than a decade ago. The current rise in world house prices, another of the BIS’s main macroeconomic concerns today, often favors the elderly at the expense of the young.
“It would be unrealistic, and indeed counterproductive, to orient monetary policy more directly to address inequality,” the BIS said, as it could reduce some of the flexibility needed to help economies and control inflation, which should help reduce inequality longer. -finished.
Chart: Rising Wealth Inequality – https://fingfx.thomsonreuters.com/gfx/mkt/jbyvrzrlzve/Pasted%20image%201624920829453.png
The BIS’s annual accounts, which were released alongside its report, showed that the bank had 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 1.5 billion euros.
The pandemic meant that the BIS eliminated the 2020 “dividend” it pays to central banks that are classified as its members, but this year it paid 520 SDR per share to make up for it.
The bank said the BIS board had also proposed paying 300 million SDRs to a Special Dividend Reserve Fund to ensure that payments can be made during future crises.
Chart: House prices rise outpacing fundamentals: https://fingfx.thomsonreuters.com/gfx/mkt/ygdpzzwwgpw/Pasted%20image%201624926885898.png
(1 euro = $ 1.1909)