Central Bank, Government Policy May Have Ended Slump, BIS Says

By Jennifer Ryan

June 8 (Bloomberg) -- The global recession may be past its worst after central bank and government policies helped shore up investor sentiment, the Bank for International Settlements said.

“Glimmers of hope that the worst of the financial crisis and economic downturn had passed sparked a rebound in risk appetite among investors,” the Basel, Switzerland-based BIS said in its quarterly report for the three months through May. “A number of policy measures contributed importantly to the improvement in investor sentiment.”

Interest rate cuts and asset purchases by central banks to combat the worst financial crisis since the 1930s have eased strains in credit markets, the BIS said. Governments also helped stoke recovery by publishing details on bank rescue plans, as did the coordinated stimulus agreed by the Group of 20 nations in London in April.

U.S. payrolls shrank less than forecast in May, the Labor Department said June 5, reinforcing signs that the deepest recession in half a century is starting to ease. German business confidence has risen for two months after touching a 26-year low in March.

The data “turned out to be less gloomy than expected, particularly for the United States,” the report said. Still, “positive news remained scarce in Japan.” The nation’s output gap, a measure of the balance between demand and supply in the economy, fell by a record in the first quarter.

The Federal Reserve, the Bank of Japan and the Bank of England have all been buying assets, partly to ease the flow of credit in their financial systems, and the European Central Bank is scheduled to join them next month.

Stress Tests

The release of U.S. bank stress tests results and details on the Public-Private Investment Program, along with news on the U.K.’s Asset Protection Scheme and the G20’s pledge of $1 trillion in aid, have also helped confidence, the BIS said.

Government bond yields have risen both because policy measures encouraged an increase in investors’ “risk appetite” and because of “growing concerns about mounting government debt,” the report said.

The yield on the 10-year Treasury note rose to the highest since November last month, while the yield on the comparable maturity U.K. government bond has returned to levels seen before the U.K. central bank started its bond purchase program.

“Sharply rising deficits have led to concerns about the sustainability of public finances and the ability of some governments to fulfill their enlarged obligations,” the BIS said.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net