Reduction of central bank liquidity should be done delicately: BIS

London

CENTRAL banks are in a dilemma. Economies are at last expanding and inflation is beginning to accelerate, following years of slack growth. The question is, how do central banks counter inflation under present circumstances? How do they withdraw excessive monetary liquidity and raise interest rates without causing a slide in global bond, equity and property markets?

In its latest annual report, the Bank of International Settlements (BIS), the central banks' central bank, discusses the difficulties in ending quantitative easing (QE) and normalising monetary policy. QE, ie, the purchase of trillions of bonds from banks and flooding the financial system with money, has caused a massive bond and equity bull market and sky-high valuations. Other assets, such as property and art, have also surged in the past few years.