Fast-evolving and unpredictable external forces mean central banks need to account for shifts in macro-economics, financial markets and technology innovation.
Produced in collaboration with the University of Cambridge Judge Business School, the Central Banks: Trends and Investment Outlook Report highlights key areas of shared practice, trends and correlations across respondents to our recent survey. In broad terms, our research reveals a gradual but definite expansion of investment and trading activities by central banks beyond traditional boundaries, which is putting pressure on existing operational infrastructure and driving demand for third-party solutions and services.
The key findings below reflect a reappraisal of investment strategy and operations, also demonstrating a need for central banks to account for fast-evolving and unpredictable external forces, notably in the realms of macro-economics, financial markets and technology innovation.
“There is both anecdotal and statistical evidence of growing sophistication and innovation by institutions willing and able to invest beyond established parameters.”
Like all institutional investors, central banks have had to adapt to a prevailing low-yield investment environment over the past decade or so. Slow, fragile recoveries in developed economies and high levels of market volatility and political risk have combined to keep interest rates and investment returns at low levels. Disappointing yields from traditional asset classes have led many central banks to re-think their investment strategies.
This has taken a number of different forms, reflecting the diversity of approaches, priorities and mandate constraints across the central banking spectrum, including investment in a wider range of asset classes, currencies, and instruments, as well as the increased use of external managers. The tactics selected might be different, but the overall trend is clear: innovation in search of yield.
The investment mandates of most central banks—as well as their broader roles and responsibilities—make them relatively cautious in exploring new investment opportunities. However, there is both anecdotal and statistical evidence of growing sophistication and innovation by institutions willing and able to invest beyond established parameters.
A number of institutions are looking well beyond the central banks’ traditional focus on G-10 currency-denominated government debt, with some looking at a range of alternative assets.
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