Investors should prepare for volatility in global markets, according to the top economist at the world’s central banking body.
In comments made ahead of the launch of the Bank for International Settlements’ (BIS) Quarterly Review, Claudio Borio, head of the monetary and economic department at the BIS, warned that markets and the global economy are ‘sailing in uncharted waters’ and that it is ‘unrealistic to expect no further market ructions.’
Borio says: ‘Volatility is back. Not across the range of asset classes: it has largely been confined to equities, with just a few ripples in sovereign bonds and exchange rates. And we do not know how long it will stay. But it is back, and some volatility is healthy. There are few things more insidious in markets than the illusion of permanent calm. As experience indicates, that illusion can set the stage for some of the largest and most damaging losses.
‘Financial markets and the global economy are sailing in uncharted waters. And after an unusually long period of unusually low interest rates and accommodating monetary conditions, it would be unrealistic to expect no further market ructions. What we saw this quarter is simply the latest reminder of how such a period complicates exit, by inducing market participants’ risk and position-taking. In addition, it has highlighted just how much prevailing market trends depend on a benign inflation outlook.
‘No doubt, the wobble has shaken off some positions – the equivalent of pressing a reset button. But the overall picture has not fundamentally changed.’
Borio adds that central banks have to be nimble to ‘strike a balance between normalizing policy, not least to increase their room for maneuver to deal with the next downturn, on the one hand, and avoiding unnecessarily derailing the expansion, on the other.’
And he notes that they need to do so in a world that, post-financial crisis, has witnessed a further increase in overall debt in relation to incomes and output: ‘The path is a narrow one, and it requires the active support of other policies. The most recent protectionist rhetoric complicates matters further. Treading the path will call for a great deal of skill, judgment and, yes, also a measure of good fortune. But policymakers need not fear volatility as such. Along the normalization path, some volatility can be their friend.’
The BIS is owned by 60 central banks from across the globe.
