2013.08.2506:03:00UTC+00BoE's Bean: Exit From Unconventional Policies Unlikely To Be Smooth

The nature of the recovery will complicate the exit from unconventional monetary policies, Bank of England Deputy Governor Charles Bean said at the Federal Reserve Bank of Kansas City's economic policy symposium in Jackson Hole.

The recent market volatility caused by expectations of tapering in the Federal Reserve's asset purchases provided a salient reminder that it may not be smooth, he said Saturday.

"Although the adoption of accommodative policies was synchronized across the advanced economies, the heterogeneous nature of the recovery, with the United States leading the way and Europe bringing up the rear, means that exit is unlikely to be synchronized, which will complicate matters," Bean stated.

Concerns about the risks stemming from such exit prompted the BoE to offer explicit forward guidance on the future path of interest rates and asset purchases, he noted.

According to him, guidance is potentially more valuable during exit than during entry. It also provides a robust framework within which to test the scope for economic expansion without jeopardising price or financial stability.

"The knowledge that monetary policy will not be tightened until the UK's fledgling recovery is secured should boost confidence," Bean added. "Moreover, it should reduce the likelihood that the present expansionary monetary stance is withdrawn prematurely through an upward movement in market interest rates."

Good communication from central bank during exit is important, but it alone cannot ensure that exit will be completely smooth, central banker observed. When markets understand central bank's function, market interest rates will respond earlier as the economic data unfolds.