FLOATING EXCHANGE RATES CAN BE IMPORTANT BUFFERS AGAINST UNANTICIPATED SHOCKS SAYS BOE`S BAILY

Published on Nov 30, 2023 11:54

Andrew Bailey, the governor of the Bank of England stated yesterday that the current forex market structures have the capacity to meet consumer needs in ways undreamt of decades ago. But such decentralization also poses daunting challenges for the unwary, in terms of understanding where they can find the best liquidity, and on what terms. Delving upon how central banks should think about the relationship between FX markets and financial stability, he noted that exchange rates, particularly floating ones, can be important buffers against unanticipated shocks, allowing economies to adjust without more painful corrections in less flexible domestic prices. But FX markets can still dry up in stress periods, particularly in the presence of material imbalances in currency demand. That is why the major central banks established a permanent network of standing swap lines in the wake of the Global Financial Crisis.