The changing role of central bank foreign exchange reserves
John Nugée, formerly of State Street Global Advisors and the Bank of England, now an OMFIF Director, and Gary Smith, Head of Sovereign Wealth Institutions at Baring Asset Management, have produced two reports on the changing role of central banks' holdings of foreign exchange reserves, in September 2015 and June 2016. A third report, building on the findings in the first two reports, will be published later this year.
Global foreign exchange reserves have been under pressure as falling oil and commodity prices, economic slowdown in China and Europe, and extraordinary monetary policy responses have diminished current account surpluses and affected currency values, investment returns and capital flows. Despite the steep decline, the trend of foreign reserve accumulation over the preceding 15 years is unlikely to go into full reverse.
In recent years monetary authorities have earmarked ever-larger amounts of reserves for an ever-wider range of purposes, suggesting that central banks are unlikely to run down large portions of their reserves in pursuit of single policy objectives like maintaining a stable exchange rate. The recent experience of reserve shrinkage will instead raise the perception of what counts as adequate, both for those managing reserves and those commentating on their actions, leading to higher overall holdings in the future.
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To listen to a telephone briefing accompanying the publication of the June 2016 report, click here.