BIS chief urges central banks to hold steady as they exit easing
June 27, 2013 6:15 pm BIS chief urges central banks to hold steady as they exit easing
By Claire Jones, Economics Reporter
Central banks’ attempts to wean investors off cheap money will spark volatility but they should only change course if markets stop functioning, says the head of the Bank for International Settlements.
Jaime Caruana, the general manager of the BIS, the so-called central bankers’ bank, which counts 60 monetary authorities as members, told the Financial Times that when considering exiting years of monetary easing central banks “should not base policies on the assumption that there should not be volatility.”
“If central banks judge that they need to move slowly to a more normal situation, then I think it’s important that they don’t delay that,” Mr Caruana said to the FT from his office in Basel .
Signals that the US Federal Reserve could this year slow purchases of $85 bn-worth of bonds each month this year have sparked turbulence in global financial markets. Yields on US Treasuries have risen by almost a full percentage point since the beginning of May, triggering a rise in borrowing costs for a host of sovereigns and businesses at a time when a meaningful recovery continues to elude the global economy.
The Bank of England launched an inquiry on Wednesday into the threat from a “disorderly” rise in interest rates amid concern that the dramatic movements in yields risk destabilising the UK financial system.
Mr Caruana acknowledged that the turbulent reaction to the Fed’s timeline for exiting quantitative easing – which it plans to do by the middle of next year should economic conditions warrant it – highlighted the difficulties facing central banks as they begin to withdraw support.
“It would be very difficult to find anything wrong in the way that Mr Bernanke communicated. His communication was, in my view, very good,” he said. “Yet the volatility is there. This has perhaps to do with [the fact that] low rates have caused some distortions in asset prices and so any potential change will increase volatility.”
It was hard to judge whether the turbulence signaled deeper malaise, he said, adding that if it did, then central banks would be forced back into the fray.
“It’s too soon to say what kind of things we are seeing. But certainly it indicates that there are still fragilities, there are still sensitivities that come from excessive leverage,” Mr Caruana said, adding: “Some volatility should not stop, or delay, adjustment [by central banks]. But if the markets become clogged and are not working, then the central banks need to have a rethink.”
The BIS used its influential annual report – the nearest thing the world’s monetary authorities have to an almanac – on Sunday to call on its members to stop trying to save the global economy to no avail and instead pressurise politicians to do more.
Mr Caruana said central banks needed to chivvy governments to act but acknowledged that the build-up in public and private debt had made it more difficult for central banks smoothly to remove their support.
“We’re still dealing with a situation where the debt overhang is very high. The issue is that since the beginning of the crisis to now, debt has increased, public debt and private debt . . . therefore markets are going to be sensitive to interest rate moves.”
He added that the global nature of markets meant that “rate changes in one country are transmitted rapidly to other markets. It’s very important for the private sector to be prepared. A process of normalisation is usually associated with some reassessment and some volatility”.
The BIS said in its report that despite central bank action buying time for governments, they had not used it effectively. Mr Caruana said the proliferation of cheap money had also inflated asset-price bubbles.
“We have seen some elements of declining underwriting standards and, in terms of investors’ exuberance, you can see that in the [price of] low rated junk bonds, which still have low yields, in the granting of covenant-lite loans to highly leveraged firms, and there are [prices of the debt of] frontier sovereign borrowers with non-investment grades that are difficult to understand.
“[In emerging markets] we have had some rapid credit growth in the past few years and they are now facing this additional situation. Each of them requires close attention and they make the situation more complex.”
Mr Caruana emphasised that he was not calling for an immediate tightening of monetary policy by all central banks. He stressed that each of the BIS’s member central banks faced different economic circumstances.