2016: The year in review

The past year was characterised by dramatic political events, and central banks did not always manage to stay above the fray; we look back at some of the biggest stories
2016-year-in-review
Movers and shakers (clockwise from bottom left): Yellen, Carstens, Issing, Zeti and Carney

The past year has been marked by some of the most significant political events in decades, but also by the departure of some of central banking's biggest names, and – possibly – the signs of green shoots of recovery.

On June 23, the UK voted to leave the European Union ('Brexit'), the first of two particularly seismic political events this year. The debate in the run-up to the vote was marked by scepticism towards "experts" that saw the Bank of England (BoE) reviled by many in the Brexit camp. However, after the vote, governor Mark Carney was a rare voice of reason amid widespread political backstabbing.

The second event was, of course, Donald Trump's election as US president on November 8. Despite Trump's incendiary rhetoric during the campaign (often singling out US Federal Reserve chair Janet Yellen), markets broadly welcomed his promises of tax cuts and infrastructure spending.

The implications of a Donald Trump presidencyPresident-elect Trump will be inaugurated in January 2017

Indeed, although President-elect Trump has yet to be inaugurated – let alone implement any policies – his words appear to have been enough to restore optimism in markets. The Bank for International Settlements' (BIS) fourth-quarter review noted a semblance of normality appeared to be returning.

The strength of the US economy in December gave the Fed room to execute its second hike since rates hit rock bottom in the aftermath of 2008. The effects were soon felt elsewhere, as pressure eased on currencies such as the yen, euro and Swiss franc, offering welcome relief to the central banks in their respective countries.

Work by the BIS earlier in the year implies the world economy may have turned a corner. Repairs to the financial system appear to have supported a slight rebound in neutral rates, which could give advanced economy central banks more room for manoeuvre in 2017.

The outlook for emerging markets is more challenging, as US dollar strength leads to tighter global funding conditions. Debt levels remain very high in China, while India grapples with high levels of non-performing loans. Mexico faces an uphill battle in dealing with US rate hikes, and Turkey is also likely to be affected.

Top stories

otmar-issing-1-16Otmar Issing warned about the eurozone's "house of cards". Image: Mario Schmitt

CentralBanking.com's most-read story of the year was, by some margin, euro architect Otmar Issing's warning that the eurozone's "house of cards" looks set to collapse. "Realistically, it will be a case of muddling through, struggling from one crisis to the next one. It is difficult to forecast how long this will continue for, but it cannot go on endlessly," Issing said.

Former BoE governor Mervyn King also issued warnings, saying the International Monetary Fund needed to adjust its approach – less political support for the euro, more effort to make countries do the right thing behind the scenes. He also sketched ideas for a new approach to financial stability, the "pawnbroker for all seasons".

 


Elsewhere, the New York Fed's efforts to make a faster version of its large-scale macro model garnered attention, as did the debate over helicopter money, which perhaps seemed more pressing in the middle of the year than towards the end.

The year has also been marked by experimentation with technology. Many central banks have created schemes to support financial technology innovation, and a string of institutions have revealed plans to investigate distributed ledger technology in the past few months.

Many notable governors left their posts in 2016, and one notable governor agreed to stay on a bit longer. BoE governor Carney weathered widespread political attacks to announce he would remain in his role until 2019.

Those moving on included Malaysia's Zeti Akhtar Aziz, India's Raghuram Rajan and Australia's Glenn Stevens. Long-serving governors also stepped down, in the form of Linah Mohohlo in Botswana (17 years) and Dwight Venner in the Eastern Caribbean (at 26 years, the longest-serving central bank governor in history). And Agustín Carstens will leave the Bank of Mexico to head the BIS next year.

Other major stories this year include: the crisis in Ukraine; Venezuela's dubious honour of being the fifty-seventh country to enter hyperinflation; Kenya's battles to clean up the banking sector; reforms to inflation statistics in Argentina; questionable dealings by the Central Bank of Hungary; the resurgence of tensions over Greece; Zimbabwe's launch of "bond notes"; trouble in the Italian banking sector; the theft of $81 million from Bangladesh Bank; Rajan's salary; the BoE's new £5 note and the animal fat derivative it contains; and the scrappy race to finish Basel III (or should that be IV?).

CentralBanking.com will return on January 3, 2017.

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