World Bank chief calls on central banks to reduce their holdings of long-term bonds | Invest News

By David Lawder and Andrea Shalal

WASHINGTON (Reuters) – World Bank President David Malpass on Tuesday said central banks should cut long-term bond holdings rather than cut short-term assets as this would free up more bank capital for lending small businesses and could help control inflation.

Malpass said at a press conference that the accumulation of massive balance sheets by central banks had crowded out capital available to small businesses.

Malpass argued that central banks have absorbed trillions of dollars in bank reserves to maintain long-term bond portfolios, allocating capital to small business loans and improving strained supply chains. the COVID-19 pandemic.

“This shortage of working capital makes it difficult to reduce the inflation rate,” he said, adding that interest rate hikes and tighter credit conditions would also increase financial pressures on small businesses. .

“We need strong small business loans to solve the supply problems. We ended up with inflation.”

He said central banks were responding by reducing total assets and raising rates, but he feared this would bring inflation under control or reduce growing income inequality. But central banks in advanced countries should take a more balanced approach and reduce their portfolios of long-term bonds.

The reduction in short-term assets would only move treasury bills to other balance sheets, while the reduction in long-term assets would release more bank reserves.

Malpass also cited comments from former inflation-fighting Fed Chairman Paul Volcker that asset prices and property prices are closely linked.

“It will be difficult to stop inflation as long as there is continued support for asset prices,” added Malpass.

(Reporting by David Lawder and Andrea Shalal in Washington; editing by Matthew Lewis)

Copyright 2022 Thomson Reuters.

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