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The fundamental cause of today’s problems in the global economy is excessive and imprudent credit growth over a long period, the BIS says in its annual report. This threatened a rise in inflation and an accumulation of debt-related imbalances which would at some point prove to be unsustainable. In the event, both unwelcome phenomena are being experienced at the same time. Leaning against current inflationary pressures should imply a significantly less accommodating bias to global policy overall, even though this could create some short-run difficulties in some countries.
The BIS notes that the experience of the recent financial turmoil shows the need for a new macro-financial stability framework to resist actively the inherent procyclicality of the financial system. This would require a primary focus on systemic issues and a much more countercyclical use of policy instruments. It also demands closer cooperation between the central banking and regulatory communities in trying to identify the build-up of systemic risks, deciding what to do to mitigate them, and agreeing in advance on steps that might be taken to manage periods of stress.
“Central banks face a difficult dilemma because inflation pressures have come to the surface just when downside risks to growth have increased”, BIS General Manager Malcolm Knight noted. Moreover, important aspects of central bank functions have come under consideration, including how they provide liquidity to banks and their role in financial system oversight
To avoid the build-up of credit excesses in future would call for both monetary and macro-prudential policies to "lean against the wind" of the credit cycle, the BIS concludes.
Annual Report by chapter
Table of contents, letter of transmittal Read
I. Introduction: the unsustainable has run its course Abstract | Full Text
II. The global economy Abstract | Full Text
III. Emerging market economies Abstract | Full Text
IV. Monetary policy in the advanced industrial economies Abstract | Full Text
V. Foreign exchange markets Abstract | Full Text
VI. Financial markets Abstract | Full Text
VII. The financial sector in the advanced industrialised economies Abstract | Full Text
VIII. Conclusion: the difficult task of damage control Abstract | Full Text
Organisation, governance and activities Abstract | Full Text