Andrea Shalal and David Lawder

WASHINGTON (Reuters), – World Bank President David Malpass on Tuesday said that the central banks should cut long-term bonds rather than shrinking short term assets. This will free up bank capital and allow small-business loans to increase.

Malpass stated at a press conference that large balance sheets have drained capital from small businesses due to central bank’s amassing.

Malpass stated that the central bank has absorbed trillions upon trillions of dollars in bank reserves for long-term bonds portfolios. They also allocated capital away to lending to small businesses, and improving supply chains affected by the COVID-19 epidemic.

According to him, “This lack of working capital makes the inflation rate hard to lower” and that interest rate increases and tighter credit standards will also increase financial pressures on small business owners.

We need small-business loans for strong supply solutions. Inflation is what we have now.

Although he stated that central banks were responding to inflation by increasing rates and reducing assets, it is not likely this will reduce income inequality. The central banks of the advanced economies should be more balanced and reduce their long-term bond portfolios.

Reduced short-term assets could simply shuffle Treasury bill balances to other balances, but reducing long term assets would allow for more bank reserves.

Malpass also quoted comments made by Paul Volcker (inflation-fighting ex Fed Chairman) that asset prices are inextricably linked to goods prices.

Malpass stated that it would be difficult to curb inflation if there isn’t permanent support for asset values.