BIS Quarterly Review – September 2024: Global Economic Trends and Central Bank Policies

BIS Quarterly Review – September 2024:

Global Economic Trends

The latest issue of the Bank for International Settlements (BIS) Quarterly Review, published in September 2024, offers an insightful analysis of global economic trends and the policies adopted by central banks in response to these trends. With the global economy showing signs of recovery from the COVID-19 pandemic, the focus has shifted towards managing inflationary pressures and ensuring financial stability.

Inflation: A Global Concern

One of the most pressing issues discussed in the review is inflation, which has resurfaced as a major concern for many countries. The BIS notes that while inflation remains below central banks’ targets in some advanced economies, it is running above target in others, particularly those with a high degree of reliance on commodity exports. The review highlights the importance of maintaining price stability to ensure sustainable economic growth and financial stability.

Central Bank Policies: Adapting to New Challenges

The second part of the review delves into central bank policies, discussing how these institutions are adapting to new challenges in an increasingly complex global economic environment. The review emphasizes the importance of central banks maintaining their independence and credibility while responding to changing market conditions. It also examines the role of forward guidance, interest rates, and unconventional monetary tools in managing inflationary pressures and stabilizing financial markets.

Forward Guidance: Communicating Effectively

The review dedicates a section to the topic of forward guidance, highlighting its importance in helping markets understand the future path of monetary policy. By providing clear and consistent communication about their intentions, central banks can influence expectations and reduce uncertainty.

Interest Rates: Balancing Growth and Inflation

Another key topic explored in the review is interest rates. Central banks must carefully balance the need for growth and inflation when setting interest rates. The review discusses how different central banks have approached this challenge in recent months, with some opting to raise rates to combat inflation while others keep them low to support economic recovery.

Unconventional Monetary Tools: Adapting to a Changing World

The review also touches upon the use of unconventional monetary tools, such as quantitative easing and forward guidance, which have become increasingly important in the wake of the COVID-19 pandemic. The BIS discusses the challenges posed by these tools, including their potential side effects and the need for transparency in their implementation.

body {
font-family: Arial, sans-serif;
}

h3 {
color: #4d5b71;
}

h4 {
color: #2e6da4;
}

h5 {
color: #f1c40f;
}

h6 {
color: #8e44ad;
}

Global Economic Overview

Since the last BIS Quarterly Review, the global economy has shown mixed signs of growth and stability.

Overview of the global economy:

Economic growth rate and trends: The US economy continued its robust expansion, with a Gross Domestic Product (GDP) growth rate of 2.3% in Q2 2019, according to the US Bureau of Economic Analysis. In Europe, the Eurozone economy grew at a slower pace, with a GDP growth rate of 0.2% in Q2 2019, as reported by Eurostat. China’s economy grew at a lower-than-expected rate of 6.2% in Q3 2019, as per the National Bureau of Statistics of China. Japan’s economy contracted by 0.4% in Q2 2019, according to the Cabinet Office of Japan.

Impact of geopolitical events:

Geopolitical tensions continued to impact the global economy, with the Russia-Ukraine conflict leading to concerns over energy supplies and sanctions. The US-China trade war escalated, with both countries imposing new tariffs on each other’s goods, causing uncertainty and potential supply chain disruptions. The UK’s decision to leave the European Union (Brexit) also added to economic instability, as businesses faced uncertainty over trading arrangements and potential border disruptions.

Current state of the labor market and employment conditions worldwide:

Unemployment rates and trends: According to the International Labour Organization (ILO), global unemployment stood at 187.3 million in 2019, with an unemployment rate of 5.6%. The US had a record-low unemployment rate of 3.7% in August 2019, according to the US Bureau of Labor Statistics. Europe’s unemployment rate was 7.6%, with Spain and Greece having the highest rates at 14.3% and 16.2%, respectively. China’s unemployment rate was at a low of 3.8%.

Wage growth or stagnation in major economies:

Despite strong economic growth in some countries, wage growth remained elusive. In the US, average hourly earnings increased by 3.1% year-on-year in August 2019, while inflation outpaced wage growth. In Europe, wages grew by 1.6% in Q2 2019, with Germany and France experiencing higher wage growth than other countries. China’s average urban wage grew by 7.5% year-on-year in Q3 2019.

Analysis of inflation rates and trends, including commodity prices, energy prices, and consumer price index (CPI):

Impact of inflation on economic growth: Inflation continued to be a concern for many economies, with the US Federal Reserve raising interest rates in 2018 and 2019 to curb inflationary pressures. In Europe, the European Central Bank kept interest rates low to support economic growth, despite rising inflation. China’s consumer price index increased by 2.8% year-on-year in Q3 2019, while commodity prices and energy prices remained volatile.

Central bank responses to inflationary pressures:

Central banks responded to inflationary pressures by adjusting monetary policy. The US Federal Reserve raised interest rates in 2018 and 2019, despite concerns over a potential economic slowdown. The European Central Bank kept interest rates low to support economic growth and inflation, while the Bank of Japan maintained its aggressive monetary easing policies.

I Central Bank Policies and Monetary Trends

Overview of Major Central Banks and Their Current Monetary Policies

• US Federal Reserve (Fed): The Fed, under the leadership of Chair Jerome Powell, currently employs a multifaceted approach to monetary policy. It includes setting interest rates, engaging in quantitative easing, and implementing forward guidance. The Fed’s primary goal is to maintain the labor market near maximum employment and stabilize inflation around its 2% target.
• European Central Bank (ECB): The ECB, headed by Christine Lagarde, is focused on maintaining price stability in the euro area. It has adopted a quantitative easing program and set an inflation target of close to, but below 2%. The ECB is committed to maintaining its monetary stimulus until it sees a sustainable convergence of inflation towards its target.
• People’s Bank of China (PBOC): The PBOC, led by Governor Yi Gang, plays a crucial role in managing China’s currency and interest rates. It employs currency manipulation, interest rate adjustments, and monetary easing to control inflation and maintain economic stability. The PBOC also aims to keep the value of the Chinese yuan stable against major currencies.
• Bank of Japan (BoJ): The BoJ, under the direction of Haruhiko Kuroda, has embraced unconventional monetary policies. It uses both quantitative and qualitative easing, as well as yield curve control. The BoJ’s objective is to achieve its 2% inflation target and ensure that long-term interest rates remain at low levels.

Analysis of Central Bank Communication Strategies and Their Impact on Financial Markets

Central banks have increasingly employed transparent and accountable communication strategies to help guide market expectations. These strategies include:

1. Forward guidance: Central banks provide clear indications about future monetary policy actions to help market participants make informed decisions. Forward guidance can influence long-term interest rates and inflation expectations.
2. Transparency: Central banks share detailed information about their monetary policy decisions, economic projections, and inflation targets. This transparency can help markets better understand the central bank’s decision-making process.
3. Accountability: Central banks are expected to be responsive to economic conditions and maintain their independence from political influences. This accountability helps build trust and confidence in the central bank’s ability to manage monetary policy effectively.

The Future of Central Banking: Digital Currencies, Financial Technology, and Innovation

Central banking is undergoing a significant transformation as technological advancements reshape the financial landscape. Central banks are exploring the use of digital currencies and implementing new technologies to improve their operations. Some potential developments include:

• Central bank digital currencies (CBDCs): Central banks are investigating the issuance of digital currencies to supplement traditional fiat currencies. CBDCs could offer faster, cheaper, and more secure transactions while maintaining central bank control over the monetary supply.
• Financial technology (fintech): Central banks are collaborating with fintech companies to develop innovative solutions for retail and wholesale payments, regulatory compliance, and financial inclusion.
• Artificial intelligence (AI) and machine learning: Central banks are leveraging AI and machine learning to analyze vast amounts of data, improve forecasting accuracy, and enhance risk management capabilities.

Impact of Central Bank Policies on Financial Markets

Analysis of stock markets, bond yields, and exchange rates in major economies:

Central bank policies play a significant role in shaping investor sentiment and market trends in stock markets, bond yields, and exchange rates of major economies.

The role of central bank policies:

Central banks use various tools such as interest rates, forward guidance, and quantitative easing to influence market conditions. For instance, a decrease in interest rates by a central bank can lead to an increase in stock prices as it lowers the cost of borrowing and increases corporate profitability. Conversely, an unexpected hike in interest rates can result in a sell-off in stocks due to the higher cost of capital and reduced future earnings potential.

Central bank interventions:

Central banks employ different intervention strategies like quantitative easing and forward guidance to stabilize financial markets. Quantitative easing involves the purchase of government bonds or other securities to inject liquidity into the economy, lower interest rates, and stimulate economic growth. Forward guidance is a communication strategy used by central banks to provide clarity on future monetary policy actions and influence market expectations.

Assessment of the potential risks and opportunities for investors:

Central bank policies can create various risks and opportunities for investors.

Currency risk and volatility:

Central banks’ actions can lead to significant currency fluctuations, which impact investors holding assets in foreign currencies. For example, a sudden increase in interest rates or hawkish rhetoric from a central bank can result in a strong appreciation of its currency, leading to losses for investors holding assets denominated in that currency.

Inflation risk and its impact on long-term investment strategies:

Central bank policies can also influence inflation risks, which can affect long-term investment strategies. Persistently high inflation can erode the purchasing power of investors’ assets and lead to lower returns. Conversely, a prolonged period of low inflation or deflation can make it challenging for investors to meet their long-term financial goals.

Interest rate risk and its effect on bond yields and stock valuations:

Changes in interest rates can significantly impact bond yields and stock valuations. An increase in interest rates can lead to a decrease in bond prices due to the lower future cash flows, while an increase in stock valuations could occur if investors anticipate higher earnings due to the lower cost of capital. However, a sudden decrease in interest rates can result in an increase in bond prices and a potential sell-off in stocks if investors believe the lower cost of capital is unsustainable.

In Conclusion, we summarise the key findings from the recent BIS Quarterly Review – September 2024.

Recap of Key Findings:

Central banks have continued to implement monetary tightening, with interest rates increasing in major economies. This trend is expected to continue into 2025 as inflation remains high and economic growth slows down.

Global Economic Trends and Central Bank Policies:

These policies have significant implications for businesses, investors, and policymakers. For businesses, higher interest rates could lead to increased borrowing costs and reduced investment opportunities. Investors may need to reassess their portfolios in light of changing market conditions, while policymakers must balance the need for fiscal stimulus with the risks of inflation.

Staying Informed:

In today’s global economy, it is crucial for organisations to stay informed about these trends and policies to maintain a competitive edge. By keeping abreast of the latest developments, businesses can make more informed decisions about their strategies and investments. Moreover, understanding the potential impacts on various sectors can help in anticipating market changes and preparing for future challenges.