Keep calm and carry on with policy normalisation, BIS tells central banks

LONDON (Reuters): The recent volatility in global financial markets should not deter top central banks from lifting interest rates or ending years of unprecedented stimulus, the Bank for International Settlements said on Sunday.

The latest report from the Switzerland-based group said that after such a long period of calm there were bound to be more market wobbles and that trade war worries were making the “delicate task” of trying to normalise policy more complicated.

Nevertheless, the move toward higher interest rates, which started in the United States and is gradually gaining traction elsewhere, should continue.

“Treading the path (of policy normalisation) will call for a great deal of skill, judgment and, yes, also a measure of good fortune,” said Claudio Borio, the head of the BIS’ monetary and economic department.

“But policymakers need not fear volatility as such. Along the normalisation path, some volatility can be their friend.”

The BIS is an umbrella group for the world’s central banks so its reports are seen as an indicator of the thinking that goes on behind the closed doors of its quarterly meetings.

It dissected the recent market correction which wiped trillions of dollars off the value of global stocks. It put it down to strong US growth and wage inflation data which triggered anxiety about faster interest rate rises.

It added that the rout also showed how much risk investors and traders had taken on in the run-up to the sell-off.“The market wobble may well not be the last. Financial markets and the global economy are sailing in uncharted waters,” Borio said, referring to coming out of years of near-constant stimulus and record-low interest rates.

BIS staff also looked at the role volatility-focused Exchange Traded Funds, which buy and sell things such as VIX US stock volatility futures, played in last month’s turbulence which saw world equities shed 10 percent.

They found some market participants began ‘bidding up’ VIX futures prices as a certain point in the afternoon in anticipation of a usual end-of-day asset ‘rebalancing’ by these types of exchange-traded products (ETP).

“Due to the mechanical nature of the rebalancing, a higher VIX futures price necessitated even greater VIX futures purchases by the ETPs, creating a feedback loop,” the report said.

There was a separate section of the report too which showed the rapid growth of ‘passive funds’ like ETFs that invest in assets tracking the return of a benchmark or an index.

These type of funds now constitute 20 percent of investment fund assets and 43 percent of US equity fund assets it found. Exchange-traded funds are 40 percent of passive fund assets.

A concern is that a further rapid growth in these funds could change how markets react in times of stress, with the potential for more correlated and therefore dramatic moves if they shift on common factors rather than asset-specific ones.

Narrow path

The report pointed out, however, that the recent market turbulence had not altered the broader economic and financial picture.

Cash is far from dead and use is rising – BIS

LONDON (Reuters): Even though more people now use cards, mobile phones or even facial recognition technology to pay street performers, buy pizza or donate to church on Sundays, hard cash is showing no signs of dying out, central bankers said.

The Bank for International Settlements (BIS) said cryptocurrencies and the debate around them - such as whether cash will be replaced by virtual substitutes - are part of a broader debate about the nature of money.

The payments sector has argued that the use of cash is falling and therefore they don’t need to provide as many ATM machines or bank branches.

But in the BIS’ latest quarterly review, researchers took a closer look at whether cash is becoming a relic of the past as some claim.

“Some of the breathless commentary gives the impression that cash in the form of traditional notes and coins is going out of fashion fast,” said Hyun Song Shin, BIS economic adviser and head of research said.

“Despite all the technological improvements in payments in recent years, the use of good old-fashioned cash is still rising in most, though not all, advanced and emerging market economies.”Cash in circulation has actually risen in recent years, from 7 percent of GDP in 2000 to 9 percent in 2016, although it has fallen in Sweden and a few other places.

“The resilience of cash as a social institution reminds us of the importance of understanding the economic functions of money, beyond just the innovations in technology,” Shin said.

Still, debit and credit card payments are rising as well, from 13 percent of GDP in 2000 to 25 percent in 2016. People hold more cards and are using them for more and smaller transactions, Shin said.