Central Bankers Should Disregard Volatile Markets, Says BIS
June 24 2018 - 5:59AM
Dow Jones News
By Paul Hannon
Central bankers in the U.S. and Europe shouldn't be deterred
from raising interest rates and winding back stimulus policies by
the increased financial market volatility that will accompany their
efforts, the Bank for International Settlements said Sunday.
In its annual report, the club for central banks welcomed a
series of rate increases by the Federal Reserve, as well as the
European Central Bank's intention to halt purchases of government
bonds in December.
It urged policy makers to continue on the path of
"normalization" even if that triggers sharper prices moves in
financial assets, including those based in emerging markets.
Indeed, the BIS said such volatility would be welcome if it made
investors more cautious.
"Policy makers will need to maintain a steady hand, avoiding the
risk of overreacting to transitory bouts of volatility," the BIS
said. "Higher volatility per se is not a problem as long as it
remains contained; it is actually healthy whenever it helps inhibit
unbridled risk-taking."
The BIS also urged governments to cut back on their borrowings
and said increased sales of Treasury bonds by the U.S. government
could slow the global economic expansion.
The prospect of further rate rises by the Fed in 2018 has
weakened some emerging markets currencies as investors shift their
money into U.S. assets. However, the BIS said the Fed should not be
deterred by those moves and that governments in emerging markets
should do more to cushion themselves against the impact of capital
outflows.
"This calls for other countries, in particular emerging markets
countries, to strengthen their macro frameworks, and if possible to
implement macroprudential policies to smooth the impact of this
normalization," said AgustÃn Carstens, the BIS's general manager
and formerly the governor of the Bank of Mexico.
Mr. Carstens said the long period of stimulative policies had
created a number of "vulnerabilities," including "elevated" prices
for shares and homes that have been fueled in part by increased
borrowing.
"In previous episodes, such vulnerabilities have heralded a
range of problems, including recessions," he said, according to the
text of a speech to central bankers gathered in Basel, Switzerland
for their annual meeting.
While welcoming the Fed's moves, the BIS highlighted U.S.
government actions that could threaten the global economic
recovery. In particular, it cited the dangers of a widening trade
conflict and increased borrowing to fund tax cuts and increased
spending.
"One possible trigger of an economic slowdown or downturn could
be an escalation of protectionist measures," it said. "A second
possible trigger could be a sudden decompression of historically
low bond yields or snapback in core sovereign market yields,
notably in the United States. The prospective heavy issuance of
government debt...could add to this risk."
The BIS said that governments shouldn't be providing additional
stimulus to economies that are already growing and should instead
be cutting back on their debts.
"With due regard for country-specific circumstances, fiscal
consolidation is a priority," it said.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
June 24, 2018 06:44 ET (10:44 GMT)
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