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BIS Sees Risk of Financial Friction at Delicate Juncture

Bank for International Settlements General Manager Jaime Caruana said he is concerned that diverging monetary policies may stoke discord.

“We have reached a delicate global monetary policy configuration,” Caruana said yesterday at a conference in Punta del Este, Uruguay, according to an e-mailed copy of his speech. “If this analysis is correct, there is a real risk that frictions could multiply and intensify, especially if the economic environment were to deteriorate further,” he said, adding that conflicts may arise over currencies and bond-market investments, without providing details.

Lackluster growth from the U.S. to Japan to Europe has prompted their central banks to increase monetary stimulus, raising concerns that such moves may end up hurting emerging economies by bolstering those currencies. At the same time, advanced nations have urged countries including China to allow the markets to set their exchange rates.

While the Federal Reserve and the Bank of England’s bond-buying programs and the European Central Bank’s pledge to buy government debt have helped push down long-term borrowing costs, Caruana highlighted the effects of this shift of ownership on the securities market.

“A world in which officials hold large portions of the largest bond markets does not strike me as an ideal one,” he said. “Uncoordinated efforts to preserve liquidity, to limit reliance on short-term funding and to avoid risks of policy shifts can further segment already fractured markets.”

Considering “very high levels of public and private-sector debt, sooner or later such a world is likely to turn to inflation,” he said, adding that while this scenario had yet to emerge, “it is policy makers’ duty to prevent it from ever materializing.”

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