Central Banks Face Bumpy Road to Normalization, BIS SaysStefan Riecher
Central banks shouldn’t delay an exit from emergency policy measures even as the path may be rough, the Bank for International Settlements said.
“It will be difficult to ensure a smooth normalization,” the BIS said in its annual report released yesterday. “The prospects for a bumpy exit together with other factors suggest that the predominant risk is that central banks will find themselves behind the curve, exiting too late or too slowly.”
The warning comes after Bank of England Governor Mark Carney rowed back from earlier indications that he would raise interest rates in 2015, saying labor-market slack and weak wage growth weigh against an increase soon. In the U.S., Federal Reserve Chair Janet Yellen said this month the Fed doesn’t intend “to signal any imminent change” in policy and that the balance sheet will remain large “for some time.”
The transition “from extraordinary monetary ease to more normal policy settings” will “require deft timing and skillful navigation of economic, financial and political factors,” the BIS said. “Navigating the transition is likely to be complex and bumpy, regardless of communication efforts.”
The Basel, Switzerland-based organization, which comprises 60 central banks as members, defines itself as a bank for central banks and the world’s oldest international financial organization. It aims at promoting monetary and financial stability and acts as a forum for cooperation among central banks and the financial community.
Carney’s June 12 comments on raising rates sooner than markets predict prompted traders to bring forward bets on higher borrowing costs to February 2015 from May of that year. On June 24 he toned down his rhetoric, saying the exact timing of an increase in the benchmark rate “will be driven by the data.” His swings prompted lawmaker Pat McFadden to describe the governor as an “unreliable boyfriend” who leaves consumers and businesses in an uncertain position.
Yellen said on June 18 that discussions on exiting from record monetary policy accommodation weren’t an indication of any immediate change in policy. The comments come a year after then-chairman Ben S. Bernanke’s suggestion that the Fed may start tapering its bond purchases caused bond yields in Europe’s periphery to spike, prompting a worldwide debate about the timing of the exit strategy.
Part of this year’s BIS report focuses on the central banks’ forward-guidance strategies and the benefits and risks attached. While forward guidance has succeeded in influencing markets “over certain horizons,” it can also give rise to financial risks, the bank said.
“Forward guidance could lead to a perceived delay in the speed of monetary-policy normalization,” the BIS said. “This could encourage excessive risk-taking and foster a build-up of financial vulnerabilities.”
While an exit of the Bank of England and the Fed’s accommodative policies are more imminent, the European Central Bank and the Bank of Japan are still in the midst of providing stimulus, according to the BIS.
“The central banks from the major advanced economies are at different distances from normalizing policy,” it said.
BoJ Governor Haruhiko Kuroda has left stimulus unchanged since pledging in April 2013 to buy about 7 trillion yen ($69 billion) of government bonds each month.
The ECB this month unveiled a number of measures to fight the threat of deflation in the 18-nation euro area. The package includes a negative deposit rate and long-term loans to banks under the condition that they lend the money on to companies and households.
With inflation at less than 1 percent since October, ECB President Mario Draghi has said that he stands ready to engage in broad-based asset purchases if the currency bloc faces a deflationary spiral of falling prices and households postponing their spending plans.
“Many central banks faced unexpected disinflationary pressures in the past year, which represent a negative surprise for those in debt and raise the specter of deflation,” the BIS said. “However, risks of widespread deflation appear very low: central banks see inflation returning to target over time and longer-term inflation expectations remaining well anchored.”