8 Oct 2008, 12 pages

Central bank balance sheets

A primer on central banks and liquidity
This document serves as a primer, explaining how central banks go about injecting
liquidity into the financial system, and what the economic consequences are.

Balance sheets expand
Global central banks are serving as the most agile form of defence in the current
financial crisis. The injections of liquidity from the central banks have prevented
(to some extent) a banking and credit crisis being compounded by a liquidity crisis.
This has meant an expansion of balance sheets by central banks.

Liquidity necessary
The expansion of liquidity (and central bank balance sheets) is necessary. There
are, in practical terms, no limits to how far this liquidity can be expanded, provided
that the central banks are prepared to accept the potential market and economic
consequences of their actions. We would not view the current liquidity injections
as being inflationary.