The British Union Jack flag (R) flies amongst European Union member countries' national flags in front of the European Parliament on June 9, 2016 in Strasbourg, eastern France. Major central banks will attempt to limit market volatility as much as possible in the wake of Britain’s decision to leave the European Union.FREDERICK FLORIN/AFP / Getty Images
Major central banks will attempt to limit market volatility as much as possible in the wake of Britain's decision to leave the European Union, says Jaime Caruana, general manager of the Bank for International Settlements.
"Central banks have already communicated that they are closely monitoring the situation and stand ready to take the necessary actions to ensure orderly market functioning," Mr. Caruana said in prepared remarks on Sunday.
Some banks reportedly intervened in currency markets on Friday, worried that the volatility from Thursday's Brexit vote could harm growth.
The bank – the world's oldest international financial organization, with 60 member central banks – was holding its annual general meeting in Basel, Switzerland, over the weekend, just two days after Britain's decision to split from the EU rocked global financial markets.
"There is likely to be a period of uncertainty and adjustment. The United Kingdom is closely integrated in the global economy and it hosts one of the world's most important financial centres," Mr. Caruana said. "With good co-operation at the global level, I am confident that uncertainty can be contained and that adjustments will proceed as smoothly as possible."
The comments coincided with the release of the BIS Annual Report, in which the "broad-based economic realignment" was a central theme. Even prior to Brexit, the bank acknowledged that the global economy was highly exposed – citing maturing financial cycles, a slowdown in China, a drop in commodity prices, tightening global liquidity and a strengthening U.S. dollar.
In the 86th edition of its flagship report, the BIS said that an "urgent rebalancing" of policy is needed to encourage more sustainable global growth and address vulnerabilities in the global economy, calling for prudential, fiscal and structural policies to play a greater role.
"A firm long-term focus is essential. We badly need policies that we will not again regret when the future becomes today," the report says.
"New shocks hitting the economy or the financial system do not fundamentally change the need for this rebalancing," Mr. Caruana said, referring to Brexit. "They may make the task more complex, but also more necessary."
The BIS, often referred to as the central banks' central bank, has long worried about longer-term dangers posed by massive monetary stimulus and other measures adopted to combat the financial crisis of 2008-09 that are still largely in place across the globe. It repeated this sentiment in its most recent report, referring to the need to abandon the debt-fuelled growth model and cautioning against the reliance on ultra-low interest rates.
"Monetary policy has been overburdened for far too long," according to the report.
While it acknowledges that the global economy is not doing as poorly as rhetoric sometimes suggests – citing global growth that, while disappointing, is in line with pre-crisis historical averages and a global decline in unemployment – the BIS says the problem is more long term. The report highlights what it calls a "risky trinity" of conditions that leave the global economy highly exposed: unusually low productivity growth, historically high global debt levels and remarkably narrow room for policy manoeuvres.
"By its very nature, the risky trinity has not appeared overnight," Claudio Borio, head of the monetary and economic department of the BIS, said on a conference call with journalists the day before the Brexit vote.
"Productivity growth is slow moving, debt accumulates gradually and the narrow room for manoeuvre reflects a long series of incremental policy decisions. We are talking about years, if not decades."
Mr. Borio repeated previous criticism and renewed calls for a more long-term perspective, saying that the "current predicament in no small measure reflects the failure to get to grips with hugely costly financial booms and busts."
The report also dedicates an entire chapter to fiscal policy, which the BIS sees as an essential element to macro-financial stability, able to tackle the financial booms and busts "more systematically, and promote stability more generally." Through this, it suggests building up financial buffers during booms, so that in times of crisis, action can be taken to stimulate demand.
With a report from Reuters