Chart of the Week : Global central bank liquidity

At Saxo Bank, we believe that in the era of central bank power it is of prime importance to closely monitor the evolution of central bank liquidity to make appropriate investing decisions. The below chart tracks the evolution of total liquidity injection by the twenty two biggest global central banks expressed in percentage points of global GDP. In the wake of the outbreak, central banks all around the world have opened up widely the wave of liquidity to avoid a liquidity crunch. We estimate that global central bank liquidity reached a peak at 12.5 percentage points of global GDP in the pandemic period. This is six times more than the peak reached in the midst of the global financial crisis. Now that inflationary pressures coming from the production side, labor shortage and energy crisis are hitting the world, central banks are starting to reduce the inflow of liquidity. It is still in positive territory. But it is decelerating fast. We estimate liquidity injections by global central banks was around 3 percentage points of global GDP in the third quarter. The European Central Bank was the largest contributor to global central bank liquidity, with a level of injection reaching 1.8 percentage points. The U.S. Federal Reserve was in second position (0.9%) followed by the People’s Bank of China (0.2%). In our view, the massive amount of central bank liquidity that has flowed into financial markets is the main explanation behind the strong performance of the equity markets over the past few months. But with central bank liquidity injections falling fast, expect it will negatively impact global economic activity and financial markets in the medium- and long-term.