Research Briefing | Jul 13, 2021

Global | The slowdown in global liquidity is no cause for alarm

Although none of the big four central banks have started tapering their QE programmes yet, monetary aggregates are being pinched from different sides, bringing global liquidity dynamics slowly back to pre-crisis levels. Liquidity may still be abundant, but it’s no longer growing and in some major economies is even beginning to retreat.

The main reason for the monetary slowdown is slacker private sector credit growth. While the median private sector credit growth rate is still positive globally, some countries, most notably the US, are seeing private sector credit shrink.

Global PMIs point to optimism and bank lending standards slowly easing in most economies globally. What appears to be holding back private sector credit is an abundance of cash accumulated over the pandemic crisis.

Apparent oddities such as the Fed’s large reverse-repo operations should not be a cause for alarm. They are a natural reaction to the US Treasury’s general account drawdown and as such is just a symptom of the orderly return to the pre-pandemic functioning of the monetary system.

While liquidity is slackening globally, so far it’s been an orderly process that’s necessary to return the functioning of the global monetary system to normal.

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