Reversing crisis-era monetary policy will be “bumpy”, BIS says

Central banks should not delay doing so just for the fear of upsetting financial markets

The headquarters of the Bank for International Settlements in Basel, Switzerland. Arnd Wiegmann / Reuters

Central banks should accept that reversing crisis-era monetary policy will be “bumpy” and shouldn’t delay doing so just for fear of upsetting financial markets, according to the Bank for International Settlements.

Claudio Borio, who heads the institution’s  economics department, urged policy makers to press ahead, both to address financial stability risks and to insulate their economies against the next downturn. The BIS is effectively a bank for central banks.

"We need to normalise policy and we need to do so with a steady hand," he said in an interview accompanying the publication of the BIS Annual Report. "By steady hand I mean, in
particular, not being afraid of increases in volatility as long as they remain contained: given the initial conditions, volatility spikes are likely to occur along the way."

The remarks from Mr Borio, who is known for steering against mainstream thinking, come as the world's major monetary authorities edge toward more normal policy settings at wildly
different paces. The Federal Reserve has raised interest rates seven times since late 2015, the Bank of England once, and the ECB has only just announced it'll stop bond buying this year,
with no rate hikes until after summer 2019. The Bank of Japan is
still adding stimulus.

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Mr Borio's view contrasts with comments a week ago by US Treasury Secretary Lawrence Summers, who said central banks should be wary of raising interest rates just to control
inflation. In a speech at an ECB conference in Portugal, where he noted his differences with the BIS, Mr Summers said the consequences of another recession any time soon would "massively exceed" the problems of prices running slightly hot.
After venturing into uncharted terrain with trillions of dollars of stimulus -- and in some cases sub-zero interest rates -- to fight the global financial crisis, central banks are in
another uncertain situation as they go into reverse.
One flashpoint this year was the surge in US yields and spike in volatility in February, sparked by concerns about inflation and faster Fed tightening. The BIS has previously warned about froth in markets from excessive valuations.

For Mr Borio, as long as bouts of volatility are contained, they shouldn’t block the path to the exit.