By Marc Jones

LONDON, (Reuters) – The Omicron variant has shown that policymakers and the financial markets can not lower their guard against COVID-19. They will need to carefully calibrate their policies, according to the Bank for International Settlements on Monday.

The Swiss-based BIS, which is a central bank for the rest of the world’s central banking systems due to the regular meetings of decision makers called it the “central bank to all the other central banks” because Omicron has already led to falls in stock markets major stocks and increased uncertainty.

“The emergence of Omicron indicates that we should not lower our guard,” Claudio Borio, head of the BIS’ Monetary & Economic Department told reporters. “This is the latest reminder of how important it was to remain vigilant.”

The uncertainty surrounding the economic and human consequences of the new variant is increasing. Global financial markets also await to see if rising inflation causes major central banks, such as the U.S. Federal Reserve, Bank of England, and European Central Bank, to raise their interest rates.

The BIS report stated that financial conditions in emerging market countries have been improving. The yields on government bonds – a measure of the cost to borrow money – have risen in many emerging markets, particularly outside of Asia. Inflationary pressures are being exacerbated by a wide-based weakness of EM currencies.

Borio indicated that Omicron could cause supply-chain disruptions in the near term and that some impacts on the economy were inevitable in particular the first quarter in 2022.

He said, “This makes the tradeoffs central banks face slightly more complex than before,” but he noted that policymakers are now used to dealing with these complications.

Like every other report, the BIS also included analysis on market specific issues.

The Swiss-based forum stated in one that banks-like rules needed to keep investment funds out of destabilizing finance during market crises. [L8N2SM45C]

The report warned that policymakers could fall behind in the regulation of entities like hedge funds, pension funds and insurance companies, which together account for 50% of all global financial activity.

Asia’s emerging economies need to improve the oversight of foreign currency liquidity risk and currency hedge flexibility, since growing dollar investments leave them more vulnerable to currency swings.

The BIS also noted that currency has remained stable in spite of headwinds facing emerging markets, and in particular the “challenge”, the BIS stated about the sector’s property sector. This is where developers like China Evergrande are having trouble.