School of hard knocks

12 June 2015 By Swaha Pattanaik Follow @swahapattanaik

Rate-setters are not only tolerating big bond swings. They are actively welcoming the lessons that volatility teaches investors. But there are limits to market discipline. If borrowing costs rise enough to threaten economic recovery, policymakers will probably soften up.

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Bundesbank President Jens Weidmann told a London conference on June 11: “In my opinion, the most recent rise in yields can be largely explained as a correction of a market overshooting – a kind of re-normalisation… these market movements are a rather welcome development insofar as they help to foster risk awareness.”

Bank of England Mark Carney said in a speech on June 10: “Removing public subsidies is absolutely necessary for real markets to exist. Volatility characterises such real markets and much of the pre-crisis market making capacity among dealers was ephemeral.”

ECB Executive Board member Benoit Coeure said in an interview published in La Croix newspaper on June 10: “The ECB does not intend to counter that volatility in the short term, which would effectively give market participants a free insurance policy. However, we will not allow excessive fluctuations in financial markets to threaten the achievement of our objective, which is to ensure price stability in the medium term.”

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