BIS/Caruana: Global liquidity - Where do we stand?

04 June 2013

In his speech, Caruana underscored the importance, both for market participants and for the authorities, of being prepared for eventual exit from the 'extraordinarily accommodative global monetary conditions'.

Mr Caruana started his remarks with some words on the concept of global liquidity and the reasons to monitor it. He then tried to characterise today’s global financial conditions: the stubbornly high levels of debt in the advanced economies and the still-rising levels of debt in some advanced and emerging market economies. Then he reviewed quantity and price indicators of global liquidity. Finally, he turned to the current, unprecedented levels of monetary accommodation and the challenges that the desirable interest rate normalisation could pose.

Global financial conditions show strong cross-currents and merit policymakers' attention. In countries at the centre of the global financial crisis, deleveraging has lagged. In contrast, some advanced and emerging market economies show ongoing leveraging that in some cases is posing late financial-cycle risks. Global international bank credit shows little growth, but this aggregate conceals shrinkage of bank credit in Europe and its expansion in Asia. Aggregates that include credit extended in booming bond markets, like dollar credit outside the United States and euro credit outside of the euro area, are growing at double-digit rates.

With regard to policy, he made three suggestions:

• First, in most of the advanced economies hit by the crisis, banks, households and firms need to redouble their efforts to deleverage and to repair their balance sheets, while policymakers must redouble their efforts to enact far-reaching reforms. Crucially, progress with repairs and reforms would also allow central banks to normalise monetary policy in a manner consistent with a return to sustainable and balanced growth.
• Second, there are late-cycle risks in some of the advanced (less affected by the crisis) and emerging market economies that have been experiencing credit booms. In these cases, authorities should continue to augment the macro-prudential policies adopted to date with policies to build up financial resilience.
• And third and more generally, policymakers need to strengthen prudential policies that anticipate and meet the challenges posed by the inevitable and desirable normalisation of global interest rates.

Full speech

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