September 2017 BIS Quarterly Review: Strong outlook with low inflation spurs risk-taking

17 September 2017

Low inflation despite a stronger economic outlook helped push markets up in recent months and reduced the expected pace of tightening of monetary policy in major economies. Signs of increased risk-taking have become apparent in a number of areas, including narrow credit spreads, increased carry trade activity and looser bond covenants.

"All this puts a premium on understanding the 'missing inflation', because inflation is the lodestar for central banks," said Claudio Borio, Head of the Monetary and Economic Department.

The September 2017 issue of the Quarterly Review:

• Shows a pickup in the growth of international debt securities in the first half of 2017, when total stocks rose to $22.7 trillion. The outstanding stock of securities issued by banks grew at its fastest pace in six years.
• Calculates that credit-to-GDP ratios remained well above trend levels for a number of jurisdictions, often coinciding with wide property price gaps. Demand from projects financed by property developers may play a role.
• Reviews the doubling in outstanding government debt of emerging market economies since 2007, to $11.7 trillion at end-2016.
• Reports on new data initiatives aimed at assessing the exposure of economies to foreign currency risk.

Special features look at topical issues in global markets and economics:

• Claudio Borio, Robert McCauley and Patrick McGuire (BIS) analyse the amount of debt incurred by borrowing through FX swaps and forwards, a missing element in assessments of financial stability risk. The authors estimate the size, distribution and use of this missing debt, and assess its implications for financial stability.
• Morten Bech (BIS) and Rodney Garratt (UCSB)* outline how central banks might create and use blockchain-based digital currencies. They identify two types of such potential central bank cryptocurrencies, one for consumers and the other for large-value payments, and compare them with existing payment options.
• Codruta Boar, Leonardo Gambacorta, Giovanni Lombardo and Luiz Pereira da Silva (BIS)* find that countries which frequently use macroprudential tools have tended to have higher and more stable economic growth rates. On the other hand, ad hoc interventions could hurt growth.
• Torsten Ehlers and Frank Packer (BIS) argue that more consistent standards for green bonds could help develop the market for instruments to finance investments with environmental or climate-related benefits.

Press release

Quarterly review

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