Global central banks experienced losses managing their reserves last year amid bond-heavy allocations that took a major hit in 2022 following aggressive monetary policy tightening around the world, according to the latest survey by a think tank group.
About 40% of reserve managers surveyed said it will take one to two years to recover losses in 2022, while nearly a quarter believe it will take two to five years.
The Official Monetary and Financial Institutions Forum (OMFIF), an organization that tracks central banking and economic policy, surveyed 75 reserve managers overseeing nearly $5 trillion in assets, or about a third of total global reserves currently estimated at $15 trillion. Current reserves are down from a peak of $15.7 trillion seen in late 2021.
Currency interventions last year by monetary authorities to prop up their financial units against a resurgent dollar have also contributed to portfolio losses on central bank reserves, OMFIF said in the report.
“If you look at it from a 12-month perspective — from March 2022 to March 2023, they (central banks) were down about 4% in terms of total reserves,” Nikhil Sanghani, OMFIF’s head of research told Reuters in an interview.
“That’s the effect of intervention and the rest would be market losses, we assume, on fixed-income portfolios,” he added, noting that about 40% of their portfolios are in government bonds.
For instance, the U.S. bond market, the largest in the world, had the worst-ever year on record in 2022, bond strategists said, as the Federal Reserve undertook multiple 75 basis-point hikes over the last year to curb stubbornly-high inflation, before decelerating its pace.
“The losses on reserves are an unusual situation because of the sharp rise in interest rates,” said Sanghani. “Generally speaking over the last five to 10 years, central bank reserve managers have done pretty well because of the low interest rate environment.”
Yet despite losses incurred with bond holdings, reserve managers are planning to increase allocation to this market, along with gold over the next two years, turning risk-averse on concerns about a global slowdown, the OMFIF survey showed.
The survey also showed that 32% of reserve managers plan to increase allocation to bonds over the next two years, compared with 5% in 2021, and 10% in 2022.
The fear of stagflation, a scenario characterized by high inflation, as well as sluggish growth and unemployment, is driving that fear to safety, OMFIF said. About 38% of reserve managers expect a global recession over the next 12 months.
