BIS upbeat on world economy, sees inflation risk
05:35 a.m. Jun 08, 1998 Eastern
By Alice Ratcliffe
BASLE, Switzerland, June 8 (Reuters) - The Bank for International
Settlements said on Monday that the world's economy is in good shape
despite upsets in Asia, and that central banks in most industrialised
nations must be on the alert against factors which could prove
inflationary down the road.
At its annual shareholders' meeting, bringing together central bankers
from around the world, BIS Chairman Alfons Verplaetse said in the text
of a speech that overall inflation rates throughout the world have
''tended to converge to a low level.''
But he warned central bankers against becoming complacent.
With respect to the macroeconomic situation, the BIS said in its annual
report that at least in some of the continental European countries,
''the primary concern now is excessively easy financial conditions and
the potential for more generalised inflationary pressures.''
This may be especially true in Germany, where ''the Asian crisis may
have served to heighten such fears if the Bundesbank's decision to
eschew further monetary tightening was due, in part at least, to
concerns about how these Asian developments might affect a still
sluggish German economy.''
As to the United States and United Kingdom, ''the rise in the external
value of their currencies has played a significant role in keeping down
measured inflation,'' the BIS report said.
But it added widening trade deficits in those countries may eventually
''feed back to the exchange rate, implying that disinflationary gains
from this source would also have to be surrendered. Indeed, the first
indications of this might be seen when the dollar and pound sterling
simply cease to rise.''
In such case there may be a need for these country's monetary policy to
take a stronger stand against inflation.
''Monetary policy might then need to take more of a leading role in
maintaining price stability, and this would be all the more likely were
the recent downward trend in commodity prices to reverse,'' Verplaetse
said in the text of his speech.
He also warned that the strong performance in most of the industrialised
world's stock and bond markets may harbour inflationary dangers down the
road.
''In setting monetary policy, the implications of rising asset prices
for spending and inflation must obviously be taken into account,'' he
said.
Property prices also bear watching: ''While property prices figured
prominently in earlier crises, and such prices have only just begun to
turn up in many industrial countries, the current rapid expansion of
monetary aggregates in a number of countries needs to be closely
monitored,'' Verplaetse said.
Despite strengthening seen in many economies, however, the BIS's annual
report said the Asian crisis was still working its way through financial
and social systems: ''While financial markets have stabilised somewhat,
the full impact on domestic companies and the institutions that have
lent to them remains to be seen, as do the full social costs,'' it said.
The BIS and the governors of the Group of 10 (G10) central banks which
meet regularly in its headquarters in Basle have chastised banks and
markets for ignoring the signs of an impending crisis in Asia.
The BIS has said it will publish more data more often on lending,
including that of commercial banks to areas like Asia.
But Verplaetse, who is also the Belgian central bank governor, said more
information was not enough. Banks and financial markets must also act on
it.
''Consider how the market for years ignored the existence of BIS
international banking data which clearly indicated the potential for
liquidity problems in Asia,'' he said.
Thus, alongside transparency, financial market participants must be able
not only to assess the risks, but also should be aware that ''implicit
and explicit safety nets'' may have an impact on market behaviour, and
thus ''incentives for market discipline'' are needed.
Financial regulators need to rework and improve rules governing banking
supervision. Efforts include the so-called ''Core Principles'' drawn up
by the G10's Basle Committee on Banking Supervision. The committee,
housed in the BIS, has with the principles produced a first effort at
creating a comprehensive guide for all areas of banking supervision.
In its annual report, the BIS questioned whether comprehensive rules are
also needed for institutional investors, and whether ''current
regulatory structures, which remain fragmented along industry and
national lines, are adequately suited to an emerging financial landscape
where these borders are becoming increasingly blurred.''
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