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Central banks to find it harder to maintain forward guidance, say IIF delegates

Central banks will find it increasingly difficult to stick to their policies of giving clear forward guidance on monetary policy, as markets become more volatile, according to Lorenzo Bini Smaghi, chairman of Société Générale.

The U.S. Federal Reserve, European Central Bank and Bank of Japan have made the results of their respective monetary policy committee meetings more and more predictable in recent years, to prevent market scares such as the "taper tantrum" in 2013, when U.S. Treasury yields surged after the Fed began reducing the amount of money it was feeding into the economy.

"When you get out of [quantitative easing], you get into this forward guidance," Bini Smaghi told delegates at the Institute of International Finance annual conference in Bali, Indonesia, Oct. 13. "I think it will be much more challenging and there will be a lot more volatility. So this forward guidance will be much more difficult to implement," he said.

Comments from delegates and speakers during the conference suggest that there is a general expectation that market volatility will increase when central banks withdraw liquidity as the markets readjust to a world with less, and more expensive, credit. A European banker said central banks will find themselves looking to guide the market one way and then having to change direction. "Basically what kept happening to Mark Carney as he tried to get ahead of Brexit," he said, referencing the governor of the Bank of England's aborted plan to raise interest rates as the economic situation in the U.K. changed.

The Bank of Japan has been acting more secretively, according to Sayuri Shirai, a professor of Keio University in Tokyo and a visiting scholar at the Asian Development Bank Institute, noting "they already reduced Japanese government bond purchases tremendously, but quietly," she said.

Shirai said the Bank of Japan's massive presence in not only Japanese bonds but also equities means the bank is not able to take further moves toward normalization, even though she said "it's probably time" to do so.

"Japanese corporate profitability is high and growing. There is very strong U.S. dollar appreciation. So I think the BOJ can do some further normalization when the U.S. is strong… After the 2020 Olympics [in Tokyo], we expect some kind of recession, and then the BOJ can never get out [of quantitative easing]," she said, noting the economy in Japan is already slowing from an anticipated 1.7% this year to 1% in 2019.