BCs do not see a quick recovery after loss of reserve – 06/27/2023 – Market

Global central banks suffered losses in managing their reserves last year amid heavy bond allocations that took a big hit in 2022 after aggressive monetary tightening around the world, according to a survey by a group of experts.

Around 40% of reserve managers surveyed said it will take one to two years to recoup 2022 losses, while nearly a quarter believe recovery will take two to five years.

The Official Forum of Monetary and Financial Institutions (OMFIF), an organization that tracks central banks and economic policy, surveyed 75 reserve managers who oversee nearly $5 trillion in assets, or about a third of total global reserves today. estimated at 15 trillion. Current reserves are down from a peak of 15.7 trillion at the end of 2021.

Currency interventions last year by monetary authorities to shore up their finance units against the resurgence of the dollar also contributed to portfolio losses in central bank reserves, according to the survey.

“If you look at it from a 12-month perspective, from March 2022 to March 2023, they (central banks) fell by about 4% in terms of total reserves,” said Nikhil Sanghani, head of research at OMFIF, in an interview with Reuters.

“That’s the effect of the intervention and the rest would be market losses, we assume, in fixed-income portfolios,” he added, noting that about 40% of his portfolios are in government bonds.

“Reserve losses are an atypical situation because of the sharp hike in interest rates,” Sanghani said. “Generally speaking, over the past five to 10 years, central bank reserve managers have done very well because of the low interest rate environment.”

However, despite losses incurred on bond holdings, reserve managers plan to increase allocation to that market, along with gold, over the next two years, becoming risk-averse due to concerns over a global slowdown, it showed. the search.

The survey also showed that 32% of reserve managers plan to increase their allocation to bonds in the next two years, compared with 5% in 2021 and 10% in 2022.

The fear of stagflation, a scenario characterized by high inflation, slow growth and unemployment, is driving that fear towards security, OMFIF said. Around 38% of reserve managers expect a global recession in the next 12 months.