Central banks and their monetary policy represent the main reason why fiat currencies fluctuate on the interbank market. Their decisions to tighten or ease the monetary conditions in an economy are closely monitored by traders and investors of all sorts.
Few traders are aware, though, that the international financial system is closely coordinated by another entity that acts as the mother of all central banks. Headquartered in Basel, Switzerland, the Bank for International Settlements is one of the most emblematic banking institutions in the world.
BIS Annual Economic Report
Central bankers from all over the world meet regularly in Basel to discuss monetary developments in different parts of the world. This way, there is no surprise from, say, the Fed, that the ECB is not aware of. Or, there is no strange monetary policy decision that the Bank of Japan takes, without the Bank of England or Reserve Bank of Australia to be aware of as well. Moreover, in times of need, all the central banks work together, under the BIS umbrella, to provide the necessary help.
The BIS produces an Annual Economic Report that focuses mostly on the central banks’ role in economic activity. The report is closely watched by market participants all over the world, as it highlights the challenges ahead and provides an objective view of the current state of global economic activity.
Not surprisingly, the current report focuses on the central banks’ role during the coronavirus pandemic. It highlights the central banks’ holdings of government bonds as a share of total outstanding amounts and the proportion they have in each country’s GDP.
Another interesting point of the current paper is that central banks extended their role as a lender of last resort. In other words, the role expanded from providing funds to the non-bank sector to active intervention to support domestic currencies, as it was seen in several emerging markets.
The overall conclusion of the BIS report is that the road ahead is full of uncertainty, especially on the inflation front. This makes the job of a central bank extremely difficult. However, the paper welcomes the joint monetary and fiscal policy decisions taken in many parts of the world, designed to usher the economic burden created by the COVID-19 pandemic.
All in all, it acknowledges that unlike the Great Financial Crisis, banks and the financial sector are not the sources of the economic disturbance. Therefore, the economic response must differ from the one used a decade ago.