Major central banks will decide how and when to exit from extraordinary easy monetary policy with much less certainty that they probably will like but they cannot afford to wait for irrefutable evidence, said Jaime Caruana, general manager of the Bank for International Settlements (BIS).
Speaking to the annual meeting of Basel-based BIS, Caruana said nobody really knows “how central banks will exit, or what they will exit into.”
BIS, known as the central bankers’ bank, is owned by 60 central banks and monetary authorities, including the U.S. Federal Reserve and the Bank of Japan. About 80 central bank governors and deputies listened to Caruana’s speech.
After five years of very low interest rates and massive asset purchases, major central banks will need to draw on all their communication skills to make the exit from such policy as smooth as possible.
The expanded range of tools that central banks have crafted and used since the global financial crises – such as forward policy guidance, lending schemes, bond purchases – give central banks more flexibility and they will certainty need to use that, Caruana said.
“And they will have to take decisions with much less certainty than they would probably like – waiting for irrefutable evidence may complicate exit and prove costly,” Caruana said. “The bigger the scale and scope of their interventions, the more difficult it will be to reduce them.”
Since the beginning of the global financial crises almost six years ago, central bank balance sheets have doubled from $10 trillion to more than $20 trillion while governments have continued to pile up debt, which has risen by $23 trillion since 2007, Caruana said.
Without such a forceful response, the global financial system could have collapsed, bringing the world economy down with it. But the recovery has been halting, fragile and uneven. Further rounds of policy easing has only lead to continued growth in private credit, weaker lending standards, record equity prices and record low long-term yields.
