The newly-discovered Omicron variant shows policymakers and financial markets cannot lower their guard on COVID-19 and will have to calibrate their policies carefully, the Bank for International Settlements said on Monday.
Dubbed the central bank to the world’s central banks, the Swiss-based BIS said Omicron had already caused falls in major stock markets and ramped up uncertainty.
“The emergence of Omicron indicates that we should not lower our guard,” Claudio Borio, head of the BIS’ Monetary & Economic Department said. “This was the latest reminder that we have to be watchful.”
As uncertainty rises over the potential human and economic costs of the new variant, global financial markets are also waiting to see whether surging inflation drives central banks like the U.S. Federal Reserve, the Bank of England and the European Central Bank to raise interest rates.
Financial conditions have already been tightening for many emerging market (EM) economies, the BIS said.
Government bond yields — a proxy for the cost of borrowing — have risen, especially outside emerging Asia, while a broad-based weakening of EM currencies has compounded inflationary pressures.
‘Complicates trade-offs’
Omicron could exacerbate supply-chain bottlenecks in the short run and some impact on economic activity was inevitable, particularly in the first quarter of 2022, Mr. Borio said.
“This of course makes the trade-offs the central banks are facing slightly more complicated than they were before,” he added.
