General Manager's statement

Statement by Mr Malcolm D Knight, General Manager of the BIS, at the BIS press conference on the occasion of the Bank's Annual General Meeting, Basel, 24 June 2007.

A warm welcome to you all.

World economic performance has recently been very positive. In 2006, global growth was unusually strong at almost 5%, and in 2007 it looks set to exceed 4% for the fifth consecutive year - this in spite of a housing-related slowdown in the United States. As well, world growth has become better balanced, with other regions of the world compensating in part for the US slowdown. Global current account imbalances stabilised last year while remaining large historically. Inflation has remained subdued, in spite of high and rising resource utilisation in major economies. Longer-term inflation expectations remain well anchored, perhaps reflecting confidence in financial markets that central banks will act to contain incipient inflationary pressures.

Most forecasts are for global growth to remain high and close to potential this year and next, with global imbalances moderating and inflation remaining low. However, there are important risks to the outlook:

• First, inflationary pressures might turn out to be more significant than anticipated and, with higher global resource utilisation, further positive shocks to demand might have a stronger impact on inflation than in the recent past.
• Second, the slowdown in the United States could become more marked than currently forecast and its global implications greater.
• Third, with asset prices elevated in many markets around the world, and with global current account imbalances still large, there remains a risk of disorderly changes in financial asset prices and exchange rates.

It is of some comfort when considering the above-mentioned risks that financial firms in mature economies appear to be better placed to withstand shocks than has often been the case before. Indeed, banks benefited last year from a benign credit environment and strong retail business, and investment banks registered record profits. This further improved capital cushions, leaving banks in a stronger position than at a similar point in previous business cycles. However, while recognising the improved resilience shown by the global financial system in the current benign environment, it is precisely at times like these that we should avoid complacency.

The stance of monetary policy, globally, became less accommodative last year and has continued to tighten in recent months. However, financial conditions are still accommodative: access to credit remains easy and credit spreads are at record lows. Containing inflationary pressures seems to require further tightening in most jurisdictions, as is expected by financial markets and reflected in long-term real bond yields. The normalisation of policy interest rates around the world should therefore continue, with the added benefit of restraining the build-up of financial imbalances. Overall macroeconomic and financial risks would be reduced further if monetary policy was supported by more fiscal consolidation, particularly in several major mature economies. Prudential policies aimed at strengthening the financial infrastructure and dampening excessive risk-taking would also help. Finally, it is important that global macroeconomic adjustment is not impeded through excessive resistance to exchange rate appreciation in those countries where appreciation is warranted by current account surpluses and positive terms-of-trade developments. The associated foreign reserve accumulation can also pose a threat to the internal balance of the countries concerned.

To conclude, let me say that the next few years could continue to produce good global economic performance, provided that the requisite policies are put in place. As always, we are confident that central banks will strive to meet the challenges they face in pursuing price stability while contributing to overall financial stability.