Financial deleveraging, inflation and risks to global growth

Notes for remarks by Mr Malcolm D Knight, General Manager of the BIS, on the occasion of the 2008 IIF Ditchley Conference on Global Economic and Financial Developments, 12-13 June 2008.

Abstract

Continued financial deleveraging and asset price declines, persistent tensions in interbank markets and substantial and involuntary increases in banks' balance sheets suggest increased restraint of new credits for productive activity. Hence, current financial conditions present significant downside risks to economic growth in the United States and other advanced economies. The easing of monetary policy undertaken in a number of key jurisdictions in recent months to address continuing stress in the financial system and the weakening growth outlook has been accompanied by increases in actual and expected price inflation at the global level. Recent trading and price developments in the oil market can be viewed as consequence and indicator of the recent pronounced loosening of monetary conditions. We thus might be entering a period of stagflation with sharply rising expected and actual inflation combined with large downside risks to growth and employment.