Financial markets face the prospect of increased volatility in the months ahead, as they grapple with the effects of central banks restoring monetary policy to more normal conditions, suggests a new report from the Bank for International Settlements (BIS).
The BIS issued its latest update on global liquidity conditions Monday, indicating that it continues to see, “further divergence in credit growth and financial market conditions among key regions, especially between advanced economies and emerging market economies.”
The report says that overall global liquidity indicators remain in line with the unusually accommodative monetary policy environment, but that market reactions to the slowing of central bank asset purchases in the U.S. suggest that the forthcoming process of normalizing policy “entails the risk of renewed bouts of volatility in financial markets and cross-border flows.”
Indeed, it notes that there will have to be “significant adjustments” as bank credit is “substantially above its pre-crisis levels, and central bank asset holdings in key advanced economies remain unusually elevated.” The report advises that both policymakers and the private sector must be be aware of the risks posed by the current environment, and that they, “will need to be prepared for the adjustment”.
“This means watching out for vulnerabilities that may have built up while conditions were accommodative. It also means taking action to build resilience in the financial system,” it says, stressing that all types of policies need to focus on ensuring that economic growth that is sustainable.
“With this longer-term view in mind, policymakers should stay the course despite the inevitable bumps in the road associated with policy normalization, although they should of course also remain alert to unexpected events and circumstances,” it concludes.