Central banks should communicate about exit from unconventional monetary policies, says IMF

Oct 10, 2013

Central banks have the tools to limit any volatility resulting from an exit from unconventional monetary policies that helped the global economy begin to recover after the financial crisis in 2008, according to the International Monetary Fund (IMF).

Central banks have the tools to limit any volatility
resulting from an exit from unconventional
monetary policies that helped the global economy begin to recover after the financial crisis in 2008, according to the International Monetary Fund (IMF).

The strong outward capital flows generated by accommodative monetary policies, which contributed to some useful rebalancing of global demand, have given rise to policy challenges in recipient countries.

Economic data and developments are the factors that determine when and how to start phasing out unconventional monetary policies, according to the institution.

Policymakers should use clear communications about their exit plans, says the IMF, adding that forward guidance is one component of a communication strategy. It also warned the exit could be bumpy, with increased volatility in long-term interest rates.

"Exit from unconventional monetary policy will lead to some normal market adjustments, but there could be additional volatility due to market reactions beyond the control of the central bank," said Karl Habermeier, an Assistant Director in the IMF's Monetary and Capital Markets Department.

Potential reasons for this volatility are: uncertainty about the future path of policy rates
as well as doubts over
the ability of central banks to perfectly control short-term market rates during exit and
the effects of asset sales on prices.ADNFCR-2976-ID-801647812-ADNFCR