Building a lasting foundation for sustainable growth is focus of BIS 81st Annual Report

Over the past year, the global economy has been moving towards self-sustaining growth, albeit in fits and starts. In emerging markets, growth has been strong, and advanced economies are recovering. But despite the good news, it would be a mistake for policymakers to relax, writes the Bank for International Settlements in its 81st Annual Report, released today.

The numerous legacies and lessons of the financial crisis require attention. In many advanced economies, high debt levels still burden households as well as financial and non-financial institutions, and the consolidation of fiscal accounts has barely started. International financial imbalances are re-emerging. Highly accommodative monetary policies are becoming a threat to price stability. Financial reforms have yet to be completed and fully implemented.

"Addressing overindebtedness, private as well as public," the BIS Annual Report says, "is the key to building a solid foundation for high, balanced real growth and a stable financial system. That means both driving up private saving and taking substantial action now to reduce deficits in the countries that were at the core of the crisis."

For monetary policy, the Annual Report states, "the challenges are intensifying even as central banks extend the already prolonged period of accommodation." Dwindling economic slack and rising commodity prices have driven up the risk of inflation. In addition, "the persistence of very low interest rates in major advanced economies delays the necessary balance sheet adjustments of households and financial institutions."

On regulatory reform, progress has been impressive, the Report notes, but "critical steps remain. Among these are the full and timely implementation of Basel III; the adoption of measures to address the systemic risks associated with very large global financial institutions; and the design of regimes to ensure the orderly resolution of such institutions in the event of their failure." As a complement to these efforts, the Report argues, the data frameworks that should serve as an early warning system for financial stress need to be improved.

Christian Noyer, BIS Chairman and Governor of the Bank of France, said today: "Real economic prospects depend critically on financial developments, both in the near term and in the long run. Policymakers intent on achieving strong, sustainable growth must continue to deepen their understanding of these links. This report contains a particularly illuminating analysis of how these links work, and how we can continue the job of building a more resilient economic and financial system."

BIS General Manager Jaime Caruana told central bankers gathered for the Bank's Annual General Meeting in Basel today that "in a number of crucial respects, the picture today is better than it was a year ago, and much better than it was in June 2009. While serious vulnerabilities remain and hard work lies ahead, it is important that we don't lose sight of how far we have come."

A key message for policymakers, Mr Caruana continued, is that "we will not have lasting macroeconomic and financial stability until we have taken decisive measures to put public finances on a sound and credible path. - No economy
- no matter how large, rich and powerful - is immune to the risks posed by fiscal incoherence." Regarding financial institutions and regulatory reform, "early action will reduce vulnerabilities, lower repair costs and strengthen resistance to unexpected events. This is particularly true for the resilience of financial firms. Where possible, we should build strength now."

Regarding its financial results, the Bank reported a balance sheet total of SDR 261.1 billion (USD 413.8 billion) at end-March 2011 and a net profit of SDR 816.0 million (USD 1,293.2 million).