Exit from loose monetary conditions may not be smooth: BIS Chief

Reuters: The process of unwinding loose global monetary conditions may not be smooth and investors and policymakers should be prepared, the head of the Bank for International Settlements (BIS) said on Tuesday.

“While central banks surely have all the tools necessary to technically engineer an exit and will doubtless do their utmost to communicate properly with market participants, it cannot be taken for granted that the process will be smooth,” BIS General Manager Jaime Caruana told a financial conference in Seoul.

The conference on global liquidity, hosted by the Bank of Korea, was closed to the media and Caruana’s speech was released by the umbrella group for the world’s central banks on its website.

Last month, global markets were rattled when some of the remarks by Federal Reserve Chairman Ben Bernanke raised speculation of a possible winding down in the Fed’s bond-purchasing program.

“All this underscores the importance – both for market participants and for the authorities - of being prepared for eventual exit from the extraordinarily accommodative global monetary conditions,” he said.

He said the exit from the currently loose monetary policy stance posed two important challenges: one of managing expectations of policy rate settings, and the other of managing the term premium as central banks signal any change of policy in relation to purchases or sales of bond duration.

Last month, Caruana also called for major central banks not to delay winding in their support programs, saying: “the balance of risks of prolonged very low interest rates and unconventional policies is shifting.”