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, 26 June 2006.

A warm welcome to you all.

You have received this morning's press release announcing the expansion of the BIS Board to include three newly elected members: Guillermo Ortiz, Governor of the Bank of Mexico; Jean-Claude Trichet, President of the European Central Bank; and Zhou Xiaochuan, Governor of the People's Bank of China. I am delighted that these eminent central bankers are joining the Board and look forward to working closely with them in this new capacity. Today's elections are the latest of a number of steps taken by the BIS in recent years to facilitate effective cooperation among increasingly diverse member central banks.

Over the past decade membership has been widened to reflect the global role of the BIS, and in this period 19 central banks, mainly of emerging market countries, have become members. The Board expansion that has been decided and announced today aligns membership of the BIS Board of Directors and BIS corporate governance more closely with the Bank's global role and the diversity of its member central banks. The fact sheet distributed with today's press release provides you with the chronological milestones of the road we have travelled since moving BIS governance beyond Europe's borders in 1994. Now, before we take your questions, I would like to turn briefly to the analysis in this year's Annual Report.

World economic performance last year was again surprisingly good, with growth stronger than had been forecast at the beginning of the year. Although headline inflation edged up in many countries, measures of core inflation hardly rose – this despite increases in oil and other commodity prices.

Global current account imbalances remain an important medium-term risk to the economic outlook. They widened unexpectedly and significantly last year. Internal imbalances – reflected in low household saving rates and rising household indebtedness accompanied by strong credit growth and inflated asset prices – also widened further in several key countries. However, financial markets remained calm until very recently.

Most forecasts project continued strong global growth and low inflation this year. Nevertheless, the outlook for inflation has become more uncertain recently, with output gaps closing in many economies and oil and other commodity prices remaining high. Although real long-term interest rates remain low, recent significant rises are weighing on global asset markets.

Current conditions raise important challenges for central banks. Monetary policy must be tightened further in several countries in order to stave off incipient inflationary pressures and reduce internal imbalances. Going forward, it will be essential for central banks to act to maintain price stability and to ensure that inflation expectations remain well anchored. The burden placed on monetary policy – and the associated risks – could be reduced by concurrent fiscal tightening, especially in countries with large current account deficits. Such support would also help reduce the risk of disorderly exchange rate movements.

The continuing large accumulation of foreign exchange reserves by several emerging market countries has been an element of the financing of the US current account deficit and has supported the US dollar. While global accumulation of official foreign exchange reserves slowed somewhat last year from the peak of 2004, it was still the third highest year on record. However, with oil exporters and China accumulating a higher share, and reserve accumulation slowing significantly elsewhere in Asia, its composition shifted somewhat. There are growing indications that high reserve accumulation is having distortionary effects on the financial systems of some countries and could compromise price stability.

Financial institutions in industrialised countries registered strong performances last year, and life insurance companies' balance sheets strengthened. At the same time, the property and casualty sector was able to manage a year of record claims. The main risks confronting the financial sector now are macroeconomic in nature. The current environment places a premium on system-wide risk management.

To conclude, let me say that the best bet for the near term is for continued strong, non-inflationary growth. Yet, considerable uncertainties and associated risks remain. We have inflationary pressures on the one hand and, on the other, a possible unwinding of accumulated economic and financial imbalances. Financial market turbulence or a long period of relatively slow growth worldwide – or both – could follow.

Fortunately, there are policies to materially reduce these risks. We are confident that central banks will rise to the challenges they face in pursuing price stability while contributing to overall financial stability.